Percentage Depletion
What Is Percentage Depletion?
Percentage depletion is a tax deduction for depreciation passable for businesses engaged with extricating petroleum products, minerals, and other nonrenewable resources from the earth.
Percentage depletion relegates a set percentage of depletion to the gross income derived from separating these nonrenewable resources. The deduction is expected as an incentive for drillers and investors to foster domestic mineral and energy production.
How Percentage Depletion Works
The rules of oil and gas accounting expect that the costs incurred to find, create, and get minerals and oil-and gas-delivering properties must be capitalized.
Percentage depletion considers an income tax deduction for these capitalized costs, mirroring the declining production of reserves after some time. The percentage depletion is a measure of the amount of depletion associated with the extraction of nonrenewable resources. It is an allowance that independent producers and royalty owners can apply to the taxable gross income of a useful well's property.
The Benefit to Investors
Oil and gas investments at the wellhead have become one of the most tax-advantaged investments that anyone could hope to find in the U.S. today due to the depletion allowance. Around 15% of 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. In any case, percentage depletion must be taken from a property that has net income (or profits).
On the off chance that a property perceives a net loss for some random tax year, percentage depletion can't be deducted.
Percentage depletion is limited to half of net income, less exploration costs.
There is no dollar limit to the deduction from income from qualified nonrenewable resources.
The reasonable statutory percentage depletion deduction is the lesser of net income or 15% of gross income. In the event that net income is under 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 considered practically all natural resources with the exception of timber.
The IRS sets different depletion rates for various resources. A portion of the rates are as per the following:
- Oil and gas, 15% percent
- Sand, rock, and squashed stone, 5%
- Borax, stone, limestone, marble, mollusk shells, potash, record, soapstone and carbon dioxide created from a well, 14%
- Sulfur and uranium, 23%
- Gold, silver, copper, iron metal, and certain oil shale from U.S. deposits, 15%
The percentage depletion formula expects that gross income be duplicated by the proper percentage.
Alternate Method
The IRS gives one more method of deciding depletion: cost depletion. Cost depletion is simpler to ascertain and includes producers discounting the real cost of their investments in light of the negligible portion of resources removed.
Since the percentage depletion deduction is a flat rate, the subsequent tax break frequently surpasses the cost depletion deduction, in this manner going about as a sizable subsidy to qualifying energy companies.
Features
- The depletion allowance has made oil and gas at the wellhead one of the most tax-advantaged investments that anyone could hope to find.
- The depreciation rates permissible shift for various resources.
- The deduction is planned to boost domestic energy production.
