Percentage depletion
The percentage depletion method gives a fixed percentage of the gross income obtained from a natural resource. It aims to help a company recoup its investment costs in a natural resource. If a company has $5 million in gross income from a resource and wants to use a 15% depletion rate over a given period, its depletion deduction would amount to $750,000 million.
An important point: Depletion rates are generally set by the type of resource. For example:
- U.S. deposits of gold, silver, copper, oil shale, and geothermal deposits are set at 15%.
- Asbestos is 10%.
- Materials such as gravel, sand shale, clay, and lava rock depletion rates are set at 5%.
As a general rule, investors have to use the method that provides the largest deduction. But unless you're an independent producer or royalty owner, the IRS says you usually can't use the percentage depletion method for oil and gas wells.
The annual deduction for percentage depletion is limited to the smaller of:
- 100% of taxable income from the property, figured without the deduction for depletion.
- 65% of taxable income from all sources, figured without the depletion allowance.
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