Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Question

Quizplus · Accepted Answer

In the context of depletion for tax purposes, a company can choose between cost depletion and percentage depletion, opting for the method that provides the larger deduction. Statement A is true because if the allowable percentage depletion ($313,000) is less than the cost depletion ($356,000), the company will choose cost depletion for a higher deduction. Statement B is true because if the allowable percentage depletion ($515,000) is more than the cost depletion ($356,000), the company will choose percentage depletion for a higher deduction. However, the total depletion deduction cannot exceed the property's adjusted basis, which is not directly addressed in these options but is an important consideration in general.