Depletion or Depreciation or both?

[TODD_M_Baker]

MO5- There is no depletion allowance from a non-producing formation as nothing has been depleted.

[Donald_Skotty]

As previously mentioned in this thread, as a practical matter, royalty owners (well 99.99% of royalty owners) will only claim the statutory (% depletion) allowance. They lack the necessary reservoir data to properly calculate cost depletion. Statutory depletion is 15% of the gross royalty received (regardless of tract or zone). Since it is gross revenue received, as @TODD_M_Baker, indicates, it only applies to producing properties.

[Mineral_Owner5]

What I am asking is, if the multiple formations under a tract of land under a lease, if a depletion is done does it only apply to a particular formation or every formation under the lease? Basically can you file another depletion for a different formation in a future well under the same lease? Legally for income tax purposes in the United States.

[TODD_M_Baker]

Depletion allowances have nothing to do with formations or leases. It has everything to do with the dollars of revenue.

[TennisDaze]

Percentage depletion is allowed for royalty income for all wells, regardless of formation or the basis in the tract. The reduction in basis applies to the tract as a whole, so it could be reduced by the depletion for one or more wells each year until it reaches zero.

[Donald_Skotty]

@Mineral_Owner5, I am not a tax attorney or a tax CPA (although I am a former non-tax CPA). I am a royalty owner, a revenue auditor, and familiar with the Federal tax depletion allowance, having claimed it for most of the last 30 years.

You claim the deduction on every dollar of gross revenue received. It doesn’t matter what formation it comes from, and it does not matter if you have fully depleted the cost basis of the formation, tract, lease or property.

Without offering tax advice, you can claim depletion as a deduction from your oil and gas revenue from any future well under the same lease.

[James_Garner1]

There is a difference between cost depletion and percentage depletion. You have the option to elect for either at the start of production to your interest. If you elect cost, then once that is fully exhausted you may switch to percentage. Most owners elect for percentage depletion due to the simplicity of application. There are some technical applications to cost depletion in multiple formations, but that will mainly apply in instances where a mineral owner elects to participate in the drilling of a well. You are looking for the best tax advice with a potential complex answer. This forum will not provide you the best answer. You need to seek the advice of a tax professional that practices in this area.

[Donald_Skotty]

Realistically, since the vast majority of royalty owners lack the necessary reserve data, cost depletion, calculated correctly is not an option. That leaves % depletion, which is simple to calculate.