Percentage Depletion

Topics: Petroleum, Taxation in the United States, Internal Revenue Service Pages: 4 (1593 words) Published: May 8, 2013
When accounting students study income tax accounting, the first concept they learn is financial accounting and income tax accounting will produce different amounts of revenue and expenses. The net income reported on financial statements will differ from the net income reported to the Internal Revenue Service. The difference is created by temporary and/or permanent tax differences. Temporary tax differences are caused by timing; these differences will eventually reverse themselves. Permanent tax differences, as the name suggests, will not be reversed. An example that most students are familiar with would be interest income earned on municipal bonds. However, many students are not familiar with the permanent tax difference that can be created by percentage depletion. This paper will give students a basic understanding of depletion, the historical background of percentage depletion, why percentage depletion was added to the tax code and the benefits and costs of using percentage depletion. DISCUSSION

To understand how a permanent tax difference is created by percentage depletion, the student needs to understand that there are two methods for calculating the depletion of mineral property: cost depletion and percentage depletion. Cost depletion is the GAAP method for financial accounting. However, for tax accounting owners of oil and gas wells have the option of using percentage depletion as described by IRS Publication 535 which states “For mineral property, you generally must use the method that gives you the larger deduction.”

IRS Publication 535 gives a detailed description of how to calculate cost and percentage depletion. To help clarify the IRS code, Joe Scarfarotti, a revenue accountant from SM Energy Company and member of Council of Petroleum Accountants Societies, explained the basic calculations for the two methods of depletion. Cost depletion is calculated as cost times the Unit of Production (UOP) rate. For this...

References: Integrated Oil Companies. (2012.) In Investopedia Financial Dictionary. Retrieved May 1, 2012 from company.asp#axzz1tfsI7Axt
IRS Publication 535 (2011). Internal Revenue Service. Retrieved April 9, 2012 from
Mead, Walter J. (1979, May). The performance of government in energy regulations. [Electronic version]. The American Economic Review, 69, 2 352-356.
Percentage completion. (2009.) Independent Petroleum Association of America. Retrieved April 9, 2012 from PercentageDepletion.pdf
Scarfarotti, Joe, SM Energy Company. Personal interview. 11 April 2012. 1775 Sherman Street, Suite 1200, Denver CO 80203
Timeline History of Natural Gas and Oil Tax Provision. Independent Petroleum Association of America. Retrieved April 30, 2012 from
United States History of Stripper Wells. U.S. Energy Information Administration. Retrieved April 20, 2012 from
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Ozone Depletion Essay
  • Ozone Depletion Essay
  • Essay about Ozone Depletion
  • Ozone Depletion Essay
  • ozone depletion Essay
  • Ozone Depletion Essay
  • Essay on Ozone Layer Depletion
  • The Ozone Layer Depletion Essay

Become a StudyMode Member

Sign Up - It's Free
Sukhwinder Singh | The Dawn Wall | Stalker leben gefährlich