Oil depletion allowance

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The oil depletion allowance in American (US) tax law is an allowance claimable by anyone with an economic interest in a mineral deposit or standing timber. The principle is that the asset is a capital investment that is a wasting asset, and therefore depreciation can reasonably be offset (effectively as a capital loss) against income.

The oil depletion allowance has been subject of interest, because of the relationship of big oil with the US government, and because one method (percentage depletion) of claiming the allowance makes it possible to write off more than the whole capital cost of the asset.

Video Oil depletion allowance

Depletion calculation

Two methods of depletion calculations are available, detailed regulations determine which can be used, but in some circumstances the asset owner can choose.

Cost depletion

With this method the original investment is effectively amortized over the productive life of the asset, starting with the original capital investment, the annual percentage being the percentage of the reserves at the beginning of the year that are sold in the course of the year. The amortized amount is deducted from the net income before calculating taxes. The total amount deducted by this method cannot exceed the original value of the capital invested.

Percentage depletion

With this method, a fixed percentage of the gross income is treated as deductible. The percentage is dependent on the nature of the resource being extracted. It is possible under this scheme for the total deductibles (or indeed the annual deductible) to exceed the original capital investment.

Table of percentages

The following percentages are prescribed by the Internal Revenue Code, section 613(b).

For geothermal assets the rate is 15%

Limits

For independent producers or royalty owners of oil and gas, the deduction for percentage depletion is limited to the smaller of:

• The taxable mineral income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code.
• 65% of the taxpayer's gross taxable income from all sources.

Amounts not deductible due to the 65% limit can be carried forward.

Maps Oil depletion allowance

Sources

This article uses text from Internal Revenue Code, Section 613(b), and Publication 535 (2013), Business Expenses which are in the Public Domain as works of the US Federal Government

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References

src: www.taxpayer.net

External links

Source of article : Wikipedia