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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

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

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

Mining, oil, gas, and other extractive industries benefit due to the diminishing value of their natural resources.