Legal Definitions - percentage depletion

Percentage depletion is a method used in the oil and gas industry that allows a taxpayer who owns an economic interest in a producing well to deduct a specified percentage of the gross income from the well instead of depleting the actual basis. This means that the taxpayer can deduct a certain percentage of the income earned from the well as a tax deduction.

For example, if a taxpayer owns an economic interest in a producing oil well and the well generates $100,000 in gross income, and the percentage depletion rate is 15%, the taxpayer can deduct $15,000 from their taxable income.

This method of depletion is different from cost depletion, which allows the taxpayer to deduct the actual cost of the well over time.

Percentage depletion is beneficial for taxpayers because it allows them to deduct a percentage of the income earned from the well, which can result in significant tax savings. However, it is important to note that there are limitations and restrictions on the use of percentage depletion, and taxpayers should consult with a tax professional to determine if they are eligible to use this method.