Who can take percentage depletion?

Percentage depletion is only allowed for independent producers and royalty owners. It is calculated by applying a 15 percent reduction to the taxable gross income of a productive well’s property.

How is cost depletion calculated?

A landowner calculates the cost depletion deduction as follows: Step 1: Divide the property’s basis for depletion by the total recoverable units, which results in a rate per unit. Step 2: Multiply the rate per unit by the units sold during the tax year to arrive at the cost depletion deduction.

What does the IRS consider a royalty?

“To be a royalty, a payment must relate to the use of a valuable right. Payments for the use of trademarks, trade names, service marks or copyrights, whether or not payment is based on the use made of such property, are ordinarily classified as royalties for federal tax purposes.”

What is timber depletion allowance?

The depletion deduction is a tax free return of how much the trees (timber), growing on your land, cost at the date you acquired the property. This purchase price includes the acreage of soil involved plus the trees and any other components of value, such as a house or water frontage that comes with the land.

What kind of depletion do you get on royalty income?

Landowners, in a majority of situations, are going to be using percentage depletion on the royalty income. This normally entitles the royalty owner to a statutory amount of 15 percent depletion based on the property’s gross income. The percentage depletion deduction is subject to two limitations:

What’s the depletion rate on a gas royalty?

Landowners, in a majority of situations, are going to be using percentage depletion on the royalty income. This normally entitles the royalty owner to a statutory amount of 15 percent depletion based on the property’s gross income.

Can a royalty owner take a tax deduction?

Royalty owners can take an income tax deduction from federal taxable income for a portion of their royalty income on account of natural gas royalties attributable to gas produced from their property.

What is the deduction for natural gas royalty?

When royalty income is received, the landowner is entitled to depletion. Similar to depreciation, depletion is the cost recovery of a natural resource and, in the case of royalty owners, natural gas. It is provided for by IRC §611 and the rules governing it are IRC § 613 and 613A.