Calculate the cost depletion allowance and percentage depletion allowance. Indic

Question

Calculate the cost depletion allowance and percentage depletion allowance. Indicate which is the most favorable calculation method for tax purposes. 3. Data Cost of acquiring mineral rights Recoverable reserves estimate Allowable Percent Depletion Rate for Coal Minerals sold, year t Mineral Sales Revenue, year t Taxable Income w/ no depletion write-off, year t Cost Depletion Allowance Percentage Depletion Allowabl S3,000,000 1,875,000 tons 125,000 tons $118,000 $531,000 Preferred Option to Minimize Taxes

Explanation / Answer

1. Cost depletion method

Cost Depletion = Total Cost of Acquiring / (Recoverable reserves + Minerals Sold) x Minerals sold esch year

Total Cost = $3,000,000

Recoverable = 1,875,000 tons

Sold = 125,000

Cost Depletion = 3,000,000 / (1,875,000 + 125,000) x 125,000 = $187,500

NOTE: It is assumed that Recoverable reserves estimate is exclusive of the minerals sold this year.

2. Percentage of Depletion

In the given case allowable percent depletion rate is not given and hence the same is assumed to be 10% as given by IRS

10% of gross income = $118,000 x 15% = $11,800

Since the same is less than the 50% of the taxable income.

Percentage of Depletion = $11,800

Preferred option is Cost of Depletion method.

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