7806. How is cost depletion calculated?Nuco Employeercline202014-07-15T15:41:00Z2014-07-15T15:41:00Z35463117Summit Business Media257365614Site Map/Investments/Oil and Gas/DepletionTaxFactsDefaultArticle122871257-00-tf2.xml1257.00;#1910;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2How is cost depletion calculated?9700.00000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:14:20Z7806. How is cost depletion calculated?Cost depletion is calculated on each oil or gas property by a unit of production method using the following formula:Treas. Reg. §1.611-2(a).Cost depletion = Basis of property × Units soldfor tax yearUnits remaining as of tax yearduring yearBasis. For this purpose, “basis” is the adjusted tax basis (including adjustments reflecting prior years’ depletion deductions) of the oil or gas property (i.e., excluding the basis of any land or depreciable improvements) that would be used to determine the gain on a sale of the property.IRC Sec. 612; Treas. Regs. §§1.611-2, 1.612-1(a). If an election has been made to capitalize intangible drilling and development costs, some of those costs may be reflected in the individual’s adjusted tax basis (See Q 7797).Treas. Reg. §1.612-1(b)(1). In the case of limited partners in an oil or natural gas program, the partnership will allocate to each limited partner the limited partner’s proportionate share of the tax basis in each propertyTreas. Reg. §1.613A-3(e)(1). (see Q 7801). In the case of community property interests, a surviving spouse’s basis for calculating cost depletion on property representing the surviving spouse’s one-half share of the property will be stepped up or down to reflect the property’s estate tax value in the decedent spouse’s estate (generally, fair market value at the date of death). But see Q 521.Rev. Rul. 92-37, 1992-1 CB 195.Units. For purposes of the formula, mineral deposits remaining and amounts sold are determined using the unit customarily paid for in the type of mineral sold. In the case of oil, the unit is “barrels”; in the case of natural gas, the unit is “thousands of cubic feet.”Treas. Reg. §1.611-2(a)(1).Units remaining. The number of units remaining as of the tax year is the number of units of mineral remaining at the end of the year to be recovered from the property (including units recovered but not yet sold) plus the number of units sold during the year.Treas. Reg. §1.611-2(a)(3). For this purpose, if the number of recoverable units remaining at the end of the prior year (or years) has been estimated and there have been no known changes that would affect such estimate, the number of recoverable units as of the tax year is the number remaining from the prior estimate.Treas. Reg. §1.611-2(c)(2).Units sold. In the case of a cash basis taxpayer, the number of units sold during the tax year includes units for which payments were actually received during the year, even if such units were sold or produced in a prior year. Units sold but not paid for in the tax year are not counted in that year.Treas. Reg. §1.611-2(a)(2).In the case of natural gas, where the annual production is not metered and is not estimable with reasonable accuracy, cost depletion for the tax year may be calculated by multiplying the adjusted tax basis of the property (see “Basis” above) by a fraction, “the numerator of which is equal to the decline in rock pressure during the tax year and the denominator is equal to the expected total decline in rock pressure from the beginning of the tax year to the economic limit of production.”Treas. Reg. §1.611-2(a)(4).Once an individual’s adjusted tax basis for a mineral property has been reduced to zero through reductions for allowable depletion deductions (or otherwise), cost depletion is no longer available with respect to such property; however, if eligible, the individual may continue to use percentage depletion. (See Q 7807).See Treas. Reg. §1.611-2(b)(2).