What Is Percentage Depletion for Taxes?

Percentage depletion is a tax deduction that helps independent producers and royalty owners account for the reduction of a nonrenewable mineral resource, such as oil, gold, and iron, and to recover the associated cost. Another option for calculating depletion is the cost depletion method. This deduction is very similar to depreciation but is specific to the natural resource industry.

Learn more about calculating your small business taxes.

Who Qualifies for the Percentage Depletion Deduction

Depletion can be claimed by individuals, corporations, estates, and trusts with an economic interest in an income-generating natural resource (except timber). If you possess any of the following types of economic interests, you may be eligible to take advantage of this extremely valuable tax saving tool.

Royalty interest: A property interest that entitles the owner to receive a share in the production from the natural resource deposit
Working interest: An investment interest where the investor is liable for the cost of production
Net profit interest: A nonoperating interest where the investor shares in the gross income

How To Calculate Percentage Depletion

To figure out the percentage depletion deduction, you need to multiply the assigned depletion rate by your gross income from the property. In any year that you use percentage depletion, the total sum of the deduction cannot exceed 50% (100% for the oil and gas industry) of your taxable income. While the deduction has this limitation, it still leads to a huge tax savings.

Let’s review a few percentage depletion rates and learn which rate may apply to you.

Percentage Depletion Rates

Item	Rate
Natural gas from domestic wells sold under a fixed contract in effect from Feb. 1, 1975, until the date of sale Sulfur, uranium United States deposits of anorthosite, clay, laterite, and nepheline syenite (to the extent that alumina and aluminum compounds are extracted therefrom), asbestos, bauxite, celestite, chromite, corundum, fluorspar, graphite, ilmenite, kyanite, mica, olivine, quartz crystals (radio grade), rutile, block steatite talc, and zircon, and ores of the following metals: antimony, beryllium, bismuth, cadmium, cobalt, columbium, lead, lithium, manganese, mercury, molybdenum, nickel, platinum and platinum group metals, tantalum, thorium, tin, titanium, tungsten, vanadium, and zinc	22%
Oil and gas wells―independent producer or royalty owner US deposits of deposits in the US—gold, silver, copper, iron ore, and certain oil shale, except for shale with a 7.5% depletion rate	15%
Metal mines (if not subject to the 22% or 15% rates, above), rock asphalt, vermiculite Ball clay, bentonite, china clay, sagger clay, and clay used or sold for use for purposes dependent on its refractory properties(if from a deposit not in the US or if not included among the minerals with a 7.5% or 5% depletion)	14%
All other minerals, including, but not limited to: Aplite, barite, borax, calcium carbonates, diatomaceous earth, dolomite, feldspar, fullers earth, garnet, gilsonite, granite, limestone, magnesite, magnesium carbonates, marble, mollusk shells (including clam shells and oyster shells), phosphate rock, potash, quartzite, slate, soapstone, stone (used or sold for use by the mine owner or operator as dimension stone or ornamental stone), thenardite, tripoli, trona Bauxite, flake graphite, fluorspar, lepidolite, mica, spodumene, and talc (including pyrophyllite), if from deposits outside the US	14% *The percentage is 5% for other minerals (other than slate tine 7.5% depletion category when used, or sold for use, by the mine owner or operator as rip rap, ballast, road material, rubble, concrete aggregates, or for similar purposes.*
Coal, lignite, sodium chloride, perlite, wollastonite, brucite Asbestos (if from a deposit not in the US)	10%
Clay and shale used or sold for use in manufacture of sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates	7.5%
Gravel, peat, pumice, sand, scoria, shale (except shale with a 15% depletion rate or with a 7.5% depletion rate, and stone; except stone with a 14% depletion rate) Clay used, or sold for use, in the manufacture of drainage and roofing tile, flower pots, and kindred products If from brine wells—bromine, calcium chloride, and magnesium chloride	5%

Example: Dan Conner owns a brick and tile clay mine. In 2022, the mine earned $100,000. In addition to his allowable business expenses and without regard for qualified business income deduction (QBID), Conner can claim a depletion deduction of $5,000 ($100,000 x .05) for the year 2022.

Percentage depletion of minerals in excess of basis is an item of tax preference and may attract the alternative minimum tax (AMT).

Pros & Cons of Percentage Depletion


PROS	CONS
Supports the development of US oil, natural gas, and mineral resources	Has a deduction that’s limited to 65% of the taxable income on return for oil and gas properties
Allows operators to retain their earnings and reinvest back into American energy development	Has a deduction limited to 50% of taxable income from the property (100% for oil and gas properties)
Has no dollar limit to the deduction from income from qualified nonrenewable resources	Cannot be used to create a net operating loss

Reporting the Depletion

If you’re ready to file your return and wondering where to report the depletion deduction, let’s take a look at the ways the deduction is reported and learn which one applies to you.

Entity Type	Schedule/Tax Form
Partnership	Form 1065, Schedule K
S corporation (S-corp)	Form 1120S, Schedule K
Estate or trust	Form 1041, Schedule K
C corporation (C-corp)	Form 1120, Page 1, Line 21
Sole proprietorship	Schedule C, Line 12

Alternative To Percentage Depletion

Cost depletion is another method used to figure out the depletion deduction. It allocates the cost of extracting natural resources and records the cost as an expense to lower your pretax income. If you mine timber, then you must use this method. All other natural resource producers and owners (including oil and gas) must use whichever method leads to the largest depletion deduction.

Bottom Line

If you’re a natural resource independent producer or royalty owner, you don’t want to miss out on this tax deduction. Percentage depletion can create huge tax savings and can provide an opportunity to increase your business cash flow.