Suspension of Net Income Limitation for Marginal Properties Reinstated for 2009 (but not 2008). The law restores the beneficial suspension of the 100 percent-of-net-income limitation on percentage depletion deductions for marginal oil and gas properties, for tax years beginning in 2009. Thanks to the restored suspension, some taxpayers will be able to claim larger percentage depletion deductions for marginal properties next year. However, the suspension was not restored for tax years beginning in 2008. (The suspension had been in effect for many years before that.)

Domestic Producers Deduction Cut Back for 2009 and Beyond. The rate for the domestic production deduction (often called the Section 199 deduction) is scheduled to increase from the current 6 percent to 9 percent, for tax years beginning after 2009. However, the Emergency Economic Stabilization Act of 2008 reduces the otherwise allowable deduction for post-2009 years by 3 percent of the least of:

1. Oil-related qualified production activities income,
2. Qualified production activities income, or
3. Taxable income calculated without the deduction (or modified adjusted gross income calculated without the deduction for individual taxpayers).

Advisory: The intent of this unfavorable change is to effectively freeze the domestic production deduction rate for oil-related income at the current 6 percent level for tax years beginning after 2009 (when other taxpayers will benefit from the higher 9 percent deduction rate).

Less Favorable Foreign Tax Credit Rules for 2009 and Later Years. The law includes generally unfavorable changes in how taxpayers with foreign oil and gas extraction income and foreign oil-related income calculate their foreign tax credits. The changes are generally effective for tax years beginning after 2008.

Extension and Liberalization of First-Year Expensing Break for Refineries. The Act extends the 50 percent first-year expensing break for qualified refinery property in the U.S. to cover property placed in service through 2013.

The deadline for entering into binding contracts and the deadline for beginning construction are also extended for two more years, through the end of 2009, to make it easier for refineries to qualify for the first-year expensing break.

The definition of qualified refinery property is expanded to include equipment designed primarily to process liquid fuel directly from shale or tar sands. The processing of shale and tar sands is added to the list of production activities that can make additions to existing refineries eligible for the first-year expensing break.