What is Percentage depletion?

Percentage depletion is a tax benefit that allows oil and gas investors to deduct 15% of their gross income from production revenues each year, subject to a limit of 100% of taxable income from the property. Unlike cost depletion, which recovers the investor's basis over time, percentage depletion continues throughout the well's productive life regardless of whether the original investment has been fully recovered. This ongoing deduction can last 20-30 years or more for successful projects, significantly enhancing after-tax returns. Investors can choose between percentage depletion and cost depletion on an annual basis, selecting the method that provides the greater benefits. The Oil and gas deduction strategy combines percentage depletion with intangible drilling cost deductions to maximize tax advantages for energy sector investments.

Related Terms

What is the Oil depletion allowance?

What are Intangible Drilling Costs (IDCs)?

What is Depreciation?

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