Depletion allowance

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Depletion allowance is a term for either:

  • (1) a periodic assignment to expense of recorded amounts or
  • (2) an allowable income tax deduction that is related to the exhaustion of mineral reserves.

Depletion is included as one of the elements of amortization. When used in that manner, the term depletion refers only to book depletion.

Contents

Book Depletion

The portion of the carrying value (other than the portion associated with tangible assets) prorated in each accounting period, for financial reporting purposes, to the extracted portion of an economic interest in wasting natural resource.

Tax-cost Depletion

A deduction (allowance) under U.S. Federal income taxation normally calculated under a formula whereby the adjusted basis of the mineral property is multiplied by a fraction, the numerator of which is the number of units of minerals sold during the tax year and the denominator of which is the estimated number of units of unextracted minerals remaining at the end of the tax year plus the number of units of minerals sold during the tax year.

Statutory Tax-Percentage Depletion

A deduction (allowance) allowed to certain mineral producers under U.S. Federal income taxation calculated on the basis of a specified percentage of gross revenue from the sale of minerals from each mineral property not to exceed the lesser of 50 percent of the taxable income from the property computed without allowance for depletion. (There are also other limits on percentage depletion on oil and gas production.) The taxpayer is entitled to a deduction representing the amount of tax-cost depletion or percentage (statutory) depletion, whichever is higher.

Excess Statutory Depletion

The excess of estimated statutory depletion allowable as an income tax deduction over the amount of cost depletion otherwise allowable as a tax deduction, determined on a total enterprise basis.

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