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CCH Axcess Tax

Depletion Limitations

Oil and Gas

All properties for a depletion statement are designated as oil and gas properties if the "X if Non Oil and Gas" box on Interview Form E-8 is blank.

For each production type, the maximum percentage depletion available for that production type is 100 percent of the net income (as allocated above) from a single property. After being limited to 100 percent of net income, percentage depletion is then limited according to the quantity rate calculated for the return. The 50 percent of net income limitation is calculated for Alabama.

After applying the quantity limitation rates, the remaining available percentage depletion for each production type is accumulated for each property and compared to the amount of cost depletion. Allowable oil and gas depletion from a property is:

1. The greater of cost or percentage depletion (including excess percentage depletion carryover from prior year)
2. Minus the percentage depletion disallowed this year

The quantity limitation, the 65 percent limitation and the excess IDC preference amount are calculated for all oil and gas properties within the return.

Percentage depletion for oil and gas properties is limited to 65 percent of the taxable income on the return (as adjusted). For this limitation, taxable income is computed without the deduction for percentage depletion but after cost depletion is deducted (if the cost depletion exceeds percentage depletion before the limitation). If the 65 percent of taxable income limitation applies to the percentage depletion deduction, the disallowed percentage depletion is allocated to all individual properties with percentage depletion greater than cost depletion. The allocation ratio is gross percentage depletion for the property divided by total gross (unlimited) percentage depletion for all properties. Both the allowed and disallowed percentage depletion is included on the statement, "65 percent of Taxable Income Allocation."

All appropriate production information from oil and gas properties are categorized by production type on the depletion quantity limitation schedule and included in the quantity limitation computations, unless an "X" is entered in the "X to exclude from quantity limit" box.

All productive oil and gas properties are included in the computation of excess preference IDC, unless there is an "X" in the "Excess IDC option" box.

Non-oil and gas

All properties for a depletion statement are designated as non-oil and gas properties if an "X" is entered in the "X if Non Oil and Gas" box on Interview Form E-8.

Gross percentage depletion is calculated and limited to 50 percent of net income from the depletion property. Allowable non-oil and gas depletion from a property is the greater of cost or percentage depletion.

Excess percentage depletion is also computed for non-oil and gas properties as a tax preference item.