What is the percentage depletion allowance?

15%
The allowable statutory percentage 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.

How do you calculate allowable depletion?

A landowner calculates the cost depletion deduction as follows:

  1. Step 1: Divide the property’s basis for depletion by the total recoverable units, which results in a rate per unit.
  2. Step 2: Multiply the rate per unit by the units sold during the tax year to arrive at the cost depletion deduction.

Can percentage depletion exceed basis?

Cost depletion cannot exceed the property’s basis, while the use of percentage depletion is limited to the revenue from production of 1,000 barrels a day.

What does depletion mean on taxes?

Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves. There are two ways of figuring depletion: cost depletion and percentage depletion.

How does percentage depletion affect basis?

Percentage depletion is unique in that it allows a taxpayer cumulative depletion expense deductions which can exceed the basis of the depletable asset. Due to the excess benefit of percentage depletion, in order for S corporation’s shareholders to utilize the benefit, a basis increase is allowed.

Can you take cost and percentage depletion?

If you have an oil and gas well on your farmland, you should review this with a tax advisor that understands this type of taxation. But, the bottom line is you can take cost depletion based on the cost allocated to the oil reserves if cost depletion is greater than percentage depletion.

How is depletion percentage calculated?

The other method of depletion is percentage depletion, which is calculated by multiplying the gross income received in the tax year from extracting a resource by an IRS-determined percentage established for each resource. For example, if the percentage were 22%, depletion expense would be gross income times 22%.

Does percentage depletion have to be recaptured?

Percentage depletion claimed under the exemption for independent producers and royalty owners that exceeds the tax basis in a property sold is not subject to recapture.

Is depletion the same as depreciation?

Depreciation spreads out the cost of a tangible asset over its useful life, depletion allocates the cost of extracting natural resources, such as timber, minerals, and oil from the earth, and amortization is the deduction of intangible assets over a specified time period; typically the life of an asset.

Is percentage depletion subject to recapture?

Does percentage depletion reduce shareholder basis?

– Based on the unique percentage depletion basis rule, the shareholder is allowed to increase his basis by the amount that the shareholder’s cumulative depletion deduction exceeds the shareholder’s proportionate share of basis in the property subject to depletion.