J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Depletion

Depletion is a deduction allowed for certain mineral properties or timber to compensate the owner for the use of these resources.  Mineral properties include oil and gas wells, mines, other natural deposits, and standing timber. In order to claim depletion, you must be an owner or operator with an economic interest in the mineral deposits or standing timber. This means that you are adversely affected economically when mineral properties or standing timber is mined or cut. Depletion is claimed separately for each mineral property, which is each mineral deposit in each separate tract or parcel of land. Timber property is each tract or block representing a separate timber account.

NOTE

Claiming depletion may result in alternative minimum tax (AMT) both for individuals and C corporations (not otherwise exempt from AMT).

Methods of Depletion

There are 2 ways to calculate depletion: cost depletion and percentage depletion.

COST DEPLETION

Cost depletion is determined by dividing the adjusted basis of the mineral property by the total number of recoverable units in the property's natural deposit (as determined by engineering reports). This figure is multiplied by the number of units sold if you use the accrual method of accounting, or the number of units sold and paid for if you use the cash method. Cost depletion is the only method allowed for standing timber. The depletion deduction is calculated when the quantity of cut timber is first accurately measured in the process ...