Percentage Depletion

Percentage depletion is a method used to account for the reduction in value of a natural resource over time as it is extracted or consumed. It allows companies to deduct a fixed percentage of the gross income generated from the resource as an expense on their taxes. This method is commonly used in industries like mining, oil, and gas, providing a tax incentive to account for the diminishing value of the resource.

Example

An oil company uses percentage depletion to deduct 15% of the gross income from its oil wells, reflecting the resource’s reduced value as it is extracted.

Key points

• A tax deduction method for the reduction in value of a natural resource.

• Allows a fixed percentage of gross income to be deducted.

• Commonly used in mining, oil, and gas industries.

Quick Answers to Curious Questions

Why do companies use percentage depletion?

It provides a tax benefit by allowing them to deduct a portion of the income generated from depleting natural resources, reducing taxable income.

How does percentage depletion differ from cost depletion?

Percentage depletion is based on a fixed percentage of gross income, while cost depletion calculates deductions based on the actual cost of the resource.