Percentage Depletion


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Percentage Depletion

A tax deduction that a miner, driller, or other producer of a non-renewable natural resource may take. It is calculated as a set percentage, which differs depending on the material, by which one may reduce one's gross income for tax purposes. For example, an oil driller in the United States may take a 15% tax deduction from his/her gross income on all income derived from the drilling of oil. Percentage depletion exists in order to encourage the exploration for and use of natural resources within the United States.

percentage depletion

Depletion calculated as a percentage of gross income derived from a natural resource. Percentage depletion is independent of the cost of the resource.

Percentage Depletion

The deduction for percentage depletion is a specified percentage of the gross income from the property, subject to other limits. Percentage depletion is allowed for nearly all natural resources, except timber. See also Cost Depletion.
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Percentage depletion allows the cost recovery to be computed using a percentage of the revenue from the sale of the oil or gas.
The amount of the percentage depletion deduction is 15% of the taxpayer's gross income from the property, limited to the lesser of the taxpayer's taxable income from the property or 65% of the taxpayer's taxable income.
Previously, income programs were generally not considered to be "tax shelters" because deductions for percentage depletion and intangible drilling and development costs were generally not available.
Under percentage depletion, the deduction for recovery of a capital investment is a percentage of the "gross income"--that is, revenue--from the sale of the mineral.
Percentage depletion is not based on the adjusted basis in the property, but instead uses a method where a specified percentage is multiplied by the investor's gross income from the property for that year.
The percentage depletion allowance can be a major tax advantage since it generally will permit a deduction greater than the amount computed on a cost depletion basis and the investor may continue to use it even when the right to use cost depletion has been exhausted.
Suspension of the 100 percent taxable income limit on percentage depletion deductions for oil and gas production from marginal properties;
Generally, under the percentage depletion method, the percentage of depletion deducted may not exceed 100% of the net income from the property in any year.
He also asked for current-year expensing of geological and geophysical costs, elimination of the net income limitation on percentage depletion for marginal wells, elimination of the 65 percent net taxable income limit on percentage depletion, and eliminating paris of the alternative minimum tax.
100% net income limitation for percentage depletion from marginal wells was suspended for an additional two years to include taxable years beginning in 2002 and 2003.
In 1998, the International Center for Technology Assessment tried to tally the hidden tolls, which ranged from outright government subsidies to oil companies (like the Percentage Depletion Allowance that lets them write off $784 million to $1 billion a year for oil they've already pumped) to providing military protection in the Middle East ($55 billion to $96 billion per year).
For tax years beginning after 1999, percentage depletion on the marginal production of oil or natural gas is limited to taxable income from the property figured without the depletion deduction.