7808. How is percentage depletion calculated on oil or gas properties for independent producers and royalty owners?Nuco Employeercline202014-07-15T14:54:00Z2014-07-15T14:54:00Z48404792Summit Business Media3911562114Site Map/Investments/Oil and Gas/DepletionTaxFactsDefaultArticle2005-12-20T00:00:00Z122881258-00-tf2.xml1258.00;#1910;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2How is percentage depletion calculated on oil or gas properties?10500.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:15:25Z7808. How is percentage depletion calculated on oil or gas properties for independent producers and royalty owners?In the case of an individual who qualifies as an independent producer or royalty owner (often referred to as a “small producer” (See Q 7803)), percentage depletion is available using a rate of 15 percent. However, in this case, percentage depletion is calculated only on so much of the individual’s average daily production of crude oil or natural gas as does not exceed the individual’s maximum daily depletable quantity.IRC Sec. 613A(c)(1). In the case of crude oil, an individual’s “maximum daily depletable quantity” is generally 1,000 barrels.See IRC Sec. 613A(c)(3). In the case of natural gas, an individual’s maximum daily depletable quantity equals the amount determined by multiplying 6,000 cubic feet by the number of barrels by which the individual has elected to reduce his or her maximum daily depletable quantity of crude oil. (In other words, one barrel of crude oil is deemed to equal 6,000 cubic feet of natural gas, and an individual’s maximum daily depletable quantity must be allocated between crude oil and natural gas such that the total daily depletable quantity is the equivalent of 1,000 barrels of crude oil).IRC Sec. 613A(c)(4); Treas. Regs. §§1.613A-3, 1.613A-5, 1.613A-7(i). If an individual’s spouse or minor children own depletable oil or gas interests, the maximum daily depletable quantity must be allocated among such family members in proportion to their respective production of crude oil during the year.IRC Sec. 613A(c)(8)(C); Treas. Regs. §§1.613A-3(h)(3), 1.613A-3(h)(4)(i). An electing large partnership (See Q 7701, Q 7801) calculates its percentage depletion without regard to these production limitations.IRC Sec. 776(a)(2).An individual’s “average daily production” of crude oil or natural gas is determined by dividing the aggregate production from all oil or gas interests, as the case may be, during the tax year by the number of days in that year. A limited partner’s annual production of oil or natural gas from specific properties is determined by multiplying the total production of each property by the limited partner’s percentage participation in the revenues from that property.IRC Sec. 613A(c)(2). A taxpayer holding a “net profits interest” determines the taxpayer’s annual production by multiplying the total production of the property by the taxpayer’spercentage participation in the revenues from the property.Rev. Rul. 92-25, 1992-1 CB 196.If an individual’s average daily production of crude oil exceeds the individual’s maximum daily depletable quantity, the amount of percentage depletion allowable with respect to each domestic property is determined using the following formula:maximum dailyPercentage = depletable quantity × 15% × gross income fromDepletionaverage daily productionproperty in tax year(all properties)This formula may also be used to determine allowable percentage depletion on natural gas production when an individual’s average daily production of natural gas exceeds the maximum daily depletable quantity.IRC Sec. 613A(c)(7).Special rules apply to the percentage depletion rate for marginal properties held by small producers. During any year in which the reference price for crude oil for the preceding calendar year drops below $20, the percentage depletion rate of 15 percent is increased by one percentage point for each whole dollar by which such reference price falls below the $20 level. However, the percentage depletion rate cannot exceed 25 percent.IRC Sec. 613A(c)(6)(C). The applicable percentage for 2001 through 2014 is 15 percent.Notice 2012-50, 2012-2 CB 121. For tax years beginning after 1997 (except 2008) and before 2012 the limit of percentage depletion to 100 percent of the taxable income from the property (computed without allowance for depletion) did not apply to marginal properties.IRC Sec. 613A(c)(6)(H). “Marginal properties” for this purpose refers only to stripper wells or wells that produce heavy oil.IRC Sec. 613A(c)(6)(D).Certain tertiary recovery projects begun or expanded after 1990 may qualify for a special tax credit; see Q 7814.An additional limitation applies to percentage depletion for small producers. The aggregate deduction for percentage depletion of a small producer’s oil and gas properties (i.e., not including percentage depletion on domestic regulated natural gas, etc. – see below) may not exceed 65 percent of the individual’s taxable income; however, for this purpose, taxable income is calculated without regard to (1) certain depletion deductions, (2) any net operating loss carryback, and (3) any capital loss carryback. If this 65 percent limitation acts to disallow a portion of the percentage depletion deduction, the disallowed amount is allocated among the producing properties in proportion to the percentage depletion otherwise allowable (but for the 65 percent limitation), and the reduced percentage depletion deduction is compared to the cost depletion allowance on a property-by-property basis to finally determine whether cost or percentage depletion is greater (for each property). Any amount disallowed by reason of the 65% limitation may be carried forward to the following year in which it again will be subject to the 65 percent limitation.IRC Sec. 613A(d)(1); Treas. Reg. §1.613A-4. An electing large partnership (See Q 7701) calculates its percentage depletion without regard to the 65 percent of taxable income limitation.IRC Sec. 776(a)(2).