What Is Percentage Depletion?

Percentage depletion is a tax deduction for depreciation allowable for businesses involved in extracting fossil fuels, minerals, and other nonr🤪enewable resources from the earth.

Percentage depletion assigns a set percentage of depletion to the gross income derived from extracting these nonr♎enewable resources. The deduction is intended as an inꦰcentive for drillers and investors to develop domestic mineral and energy production.

How Percentage Depletion Works

The rules of oil and gas accounting require that the costs incurred to find, develop, and obtain minerals and oil- and gas-producing properties must be capitalized.

Percentage depletion allows for an income tax deduction for these capitalized costs, reflecting the declining production of reserves over time. The percentage depletion is a measure of the amount of depletion associated with the 澳洲幸运5官方🃏开奖结果体彩网:extraction of nonrenewabl𒈔e resources. It is an allowance that independent producers and royalty ownerꦬs can apply to the taxable gross income 🔜of a productive well’s property.

The Benefit to Investors

Oil and gas investments at the wellhead have become one of the most tax-advantaged investments available in the U.S. today due to the depletion allowance. Approximately 15% of 澳洲幸运5官方开奖结果体彩网:gross income from oil and gas is tax-free for small investors and independent oil and gas producers.

There is no dollar limit to the total amount of depletion that can be deducted from income from qualified nonrenewable resources. However, percentage depletion can only be taken from a property that has 澳洲幸运5官方开奖结果体彩网:net income (or profits).

If a p𝓀roperty recogn🌸izes a net loss for any given tax year, percentage depletion cannot be deducted.

Percentage depletion is limited to 50% of net income, less exploration costs.

The allowable statutory percenta🉐ge depletion deduction is the lesser of net income or 15% of gross income. If net income is less than 15% of gross income, the deduction is limited to 100% of net income.

Depreciation Rates Vary

Percentage depletion is a capital cost recovery method 🦋that is allowed for nearly all natural resources except timber.

The IRS sets differ♏ent depletion ra🥃tes for different resources. Some of the rates are as follows:

• Oil and gas, 15% percent
• Sand, gravel, and crushed stone, 5%
• Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone and carbon dioxide produced from a well, 14%
• Sulfur and uranium, 23%
• Gold, silver, copper, iron ore, and certain oil shale from U.S. deposits, 15%

The percentage depletion formula requires that gross income be multiplied by the appr🀅opriate percentage.

Alternate Method

The IRS provides another method of determining depletion: 澳洲幸运5官方开奖结果体彩网:cost depletion. Cost depletion is easier to calculate and invo๊lves producers writing off the real cost of thei🦩r investments based on the fraction of resources extracted.

Since the percentage depletion deduction is a flat rate, the resulting tax break often🧜 exceeds the cost deplet𓆉ion deduction, thus acting as a sizable subsidy to qualifying energy companies.