Question 11.7: A coal mine has a gross income of $250,000 for the year. Min...
A coal mine has a gross income of \$250,000 for the year. Mining expenses equal \$210,000. Compute the allowable percentage depletion deduction.
From Table 11-2, coal has a 10\% depletion allowance. The percentage depletion deduction is computed from gross mining income. Then the taxable income must be computed. The allowable percentage depletion deduction is limited to the computed percentage depletion or 50\% of taxable income, whichever is smaller.
| Table 11-2 Percentage Depletion Allowance for Selected Items | |
| Type of Deposit | Percentage |
| Lead, zinc, nickel, sulphur, uranium | 22 |
| Oil and gas (small producers only) | 15 |
| Gold, silver, copper, iron ore | 15 |
| Coal and sodium chloride | 10 |
| Sand, gravel, stone, clam and oyster shells, brick. and tile clay | 5 |
| Most other minerals and metallic ores | 14 |
Computed Percentage Depletion
Gross income from mine \$250,000
Depletion percentage \frac{×10\%}{\$25,000}
Computed percentage depletion
Taxable Income Limitation
Gross income from mine \$250,000
Less: expenses other than depletion \frac{-210,000}{40,000}
Taxable income from mine
Deduction limitation \frac{×50\%}{\$20,000}
Taxable income limitation
Since the taxable income limitation (\$20,000) is less than the computed percentage depletion (\$25,000), the allowable percentage depletion deduction is \$20,000.