Depletion
At the desk
| Where | Schedule C/E/F line for depletion; oil & gas royalties on Schedule E |
| Cost depletion | Adjusted basis ÷ units remaining × units sold |
| Percentage | Statutory rate × gross income from the property (less royalties paid), capped at 50% of taxable income from the property (100% for oil & gas) |
| Oil & gas | 15%, independent producers and royalty owners only — this is the one you'll see on a 1099-MISC royalty |
| Rule | Take the larger of cost or percentage each year; percentage keeps going after basis hits zero |
On this page
- Cost Depletion 1 note · 2 examples
- Percentage Depletion 6 notes · 2 examples
Depletion accounts for recovery of investment in natural resources property. The rules in this section have not changed since the exam.
- Only a person who has an economic interest in a (mineral) property is entitled to deductions for depletion.
- A person has an economic interest if (s)he
- Acquires by investment an interest in the mineral in place,
- Derives income from extraction of the mineral, and
- Looks to the extracted mineral for return of capital.
- Investment need not be in cash and could, for example, be in
- Land that ensures control over access to the mineral or
- Stationary equipment used to extract and produce the mineral.
- A person has an economic interest if (s)he
- Depletable property includes mines, oil and gas wells, other natural deposits, timber, and standing timber. It does not include an oil refinery or other processing plant, which is depreciated.
Cost Depletion
- Cost depletion is computed as follows:
Adjusted basis of the property ÷ Total units remaining at the start of the year × Units sold during the year
Note. The total deductions are limited to unrecovered capital investment.
A quartz mine was acquired for $480,000 and has an adjusted basis of $210,000. An estimated 300,000 tons of quartz remained at the beginning of the year. During the year 150,000 tons were mined and 120,000 tons were sold. Depletion per unit is $210,000 ÷ 300,000 = $0.70. Cost depletion is $0.70 × 120,000 tons sold = $84,000. Tons mined but not sold do not count.
Cost of the property was $480,000 and $120,000 of depletion was taken in prior years, so adjusted basis is $360,000. With 600 units remaining, depletion per unit is $360,000 ÷ 600 = $600. If 110 units are sold, cost depletion is 110 × $600 = $66,000.
Percentage Depletion
- Percentage depletion, which allows deduction in excess of capital investment, is the lower of
- 50% of the person's TI from the property before depletion (100% for oil and gas property) or
- A percentage (specified by statute) of gross income from the property less related rents or royalties paid or incurred.
- For oil and gas property, the rate is 15% (available only to independent producers and royalty owners, limited to 1,000 barrels a day; integrated oil companies may not use percentage depletion).
- For mineral property, the taxpayer must use whichever method (cost or percentage) gives the larger deduction for the year.
- Percentage depletion continues even after the basis of the property has been fully recovered; cost depletion stops at zero basis.
| Rate | Property |
|---|---|
| 22% | Sulfur, uranium, and U.S. deposits of asbestos, lead, zinc, nickel, mica, and certain other minerals |
| 15% | Gold, silver, copper, iron ore, oil shale; oil and gas (independent producers) |
| 14% | Most other minerals and metals |
| 10% | Coal, lignite, sodium chloride |
| 5% | Gravel, sand, stone, clay, peat, shale (other than oil shale) |
Gross income from a zinc property is $1,500,000 and taxable income from the property before depletion is $380,000. The statutory rate for zinc is 22%, so the percentage figure is $1,500,000 × 22% = $330,000. The 50% limit is $380,000 × 50% = $190,000. Percentage depletion is the lesser, $190,000. Compare to cost depletion and take the larger.
A lessee mines coal and pays the landowner a royalty of $30,000. Gross income from the coal is $250,000; income from trucking the coal is separate and is not income from the property. Gross income from the property for depletion is $250,000 – $30,000 royalty = $220,000, and 10% × $220,000 = $22,000, subject to the 50%-of-taxable-income limit.
Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.