Determine the depletion charges using the percentage depletion method for the first year only for a coal mine. The applicable rate for the percentage depletion method is 10%. Cost to acquire mine rights = $150,000
Estimated mine size = 40,000 Tons
Selling price = $80 per Ton
Amount sold in year 1 = 2,000 Tons
Operating cost in year 1 = $50,000

Question

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Depletion charges in year 1 = (0.10) (2,000) (80) = $16,000
Taxable income in year 1 = 2,000(80) - 50,000 = $110,000
50% of taxable income = 0.50(110,000) = $55,000
Allowable depletion charges in year 1 = Minimum of (16,000; 55,000) = $16,000

Determine the Depletion Charges Using the Percentage Depletion Method for the First