The percentage depletion is a measure of the amount of depletion associated with the extraction of nonrenewable resources. It is an allowance that independent producers and royalty owners can apply to the taxable gross income of a productive well’s property.
How do you calculate depletion rate?
To calculate the depletion per unit you take the total cost less salvage value and divide it by the total number of estimated units. The expense is calculated by multiplying the depletion per unit by the number of units consumed or sold during the current period.
How is depletion determined for oil and gas royalties?
Depletion. Both royalty and working interests may use one of two types of depletion, cost and percentage, to determine which method yields the greater depletion deduction. For primary oil and gas, the percentage method is limited to the lesser of 15 percent of the taxable income from the property, or 65 percent from taxable income from all sources.
How much should I depreciate my oil royalties for income?
For example, if your royalties from the sale of oil are equal to $50,000, you’d be able to subtract a $7,500 depletion allowance for a taxable income of $42,500. Your gross income is what you sell the oil for near the property or the representative market or field price for any oil you refine yourself.
How does IRC 613a affect oil and gas royalties?
IRC 613A severely restricts the availability of percentage depletion for oil and gas production. In general, taxpayers classified as Independent Producers or Royalty Owners may claim percentage depletion on a limited volume of oil and gas production each year.
What kind of tax is paid on oil and gas royalties?
While we are on the subject of royalties, you will see something called “severance tax” deducted from your monthly royalty checks. Severance tax is a special type of state tax that is paid on the production of oil & gas (and other non-renewable natural resources).
