Definition
The depletion allowance is a deduction that lets owners of natural resource interests recover their investment as the resource is extracted and sold.
How It Works
Similar in concept to depreciation, depletion accounts for the using-up of a finite resource. It can be calculated under a cost method or, for qualifying interests, a percentage method based on gross income from the property.
Example
A mineral or oil and gas interest owner deducts a depletion allowance each year against income from production.
Who It Applies To
Owners of oil, gas, mineral, and similar natural resource interests.
Watch-Outs
The percentage depletion method has limits and eligibility rules, and the benefit depends on production levels and current law.
