On July 4 of the current year, Lawrence invests $240,000 in a mineral property. He estimates that he will recover 800,000 units of the mineral from the deposit. During the current year, Lawrence recovers and sells 100,000 units of the mineral for $3.50 per unit.
- What are Lawrence’s cost depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
- If the percentage depletion rate for the mineral is 10%, what are his depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
- If the statutory percentage depletion rate for the mineral is 10% and Lawrence’s income from the mineral before the depletion deduction is $9,200, what are his depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
- What are Lawrence’s cost depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
Cost depletion is calculated using the units of production method. Each year the remaining depreciable basis is allocated based on the formula:
Units Recovered During the Year
Total Estimated Units Remaining
For Lawrence, this results in a deduction for cost depletion of $30,000.
$240,000 x 100,000 = $30,000
800,000
Lawrence’s basis in the mineral property after deducting depletion is $210,000 ($240,000 – $30,000).
- If the percentage depletion rate for the mineral is 10%, what are his depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
Percentage depletion is calculated by multiplying the selling price of the mineral by the statutory rate for the mineral. Lawrence’s sales are $350,000 (100,000 x $3.50) and his percentage depletion is $35,000 ($350,000 x 10%). Lawrence’s basis in the property after deducting percentage depletion is $205,000 ($240,000 – $35,000).
- If the statutory percentage depletion rate for the mineral is 10% and Lawrence’s income from the mineral before the depletion deduction is $9,200, what are his depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
The percentage depletion deduction cannot exceed 50% of the taxable income from the mineral property before the percentage depletion deduction. Lawrence’s percentage depletion deduction is limited to $4,600 ($9,200 x 50%). Cost depletion is not subject to an income limitation. Therefore, Lawrence should deduct the $30,000 cost depletion calculated in part a to maximize his depletion deduction.
- What are Lawrence’s cost depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
Cost depletion is calculated using the units of production method. Each year the remaining depreciable basis is allocated based on the formula:
Units Recovered During the Year
Total Estimated Units Remaining
For Lawrence, this results in a deduction for cost depletion of $30,000.
$240,000 x 100,000 = $30,000
800,000
Lawrence’s basis in the mineral property after deducting depletion is $210,000 ($240,000 – $30,000).
- If the percentage depletion rate for the mineral is 10%, what are his depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
Percentage depletion is calculated by multiplying the selling price of the mineral by the statutory rate for the mineral. Lawrence’s sales are $350,000 (100,000 x $3.50) and his percentage depletion is $35,000 ($350,000 x 10%). Lawrence’s basis in the property after deducting percentage depletion is $205,000 ($240,000 – $35,000).
- If the statutory percentage depletion rate for the mineral is 10% and Lawrence’s income from the mineral before the depletion deduction is $9,200, what are his depletion deduction for the current year and his adjusted basis for the mineral deposit after deducting depletion?
The percentage depletion deduction cannot exceed 50% of the taxable income from the mineral property before the percentage depletion deduction. Lawrence’s percentage depletion deduction is limited to $4,600 ($9,200 x 50%). Cost depletion is not subject to an income limitation. Therefore, Lawrence should deduct the $30,000 cost depletion calculated in part a to maximize his depletion deduction.
