How does the oil and gas percentage depletion 65% of taxable income limit work.
Tax Professional Answers
Then, for independent producers, which is most of us, you multiply GROSS production on a well-by-well basis by 15%, but that number cannot exceed the net income from each separate well. Any excess above the net income from each separate well cannot be carried forward.
Finally, the sum of all the percentage depletion for all wells cannot exceed 65% of the taxable income of the taxpayer. Any excess can be carried forward into the next year’s 65% computation.
Whatever the result, the final percentage depletion is back-allocated to the separate wells for purposes of computing cost depletion in following years.
In computing depletion for oil and gas production, the greater of cost depletion or percentage depletion may be deducted. Cost depletion is computed by multiplying the acquisition price of the leasehold (for example) subtracting depletion deducted in prior years (cost or percentage) and multiplying by a fraction. The fraction is the past production for the year divided by an estimate of the end of the year recoverable product. Cost depletion is not available once the acquisition price has been fully recovered.
Most commercial tax preparation software does not make these computations, although Lacerte might.
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