We also were glad to see that the final bill keeps whole percentage depletion
, the LIFO accounting method and Like-Kind Exchanges for real estate.
Limits the percentage depletion
allowance for oil and gas wells:
Adjusted AMT is defined as AMT less the portion of the tax attributable to"nondeferral items," such as miscellaneous itemized deductions, state and local taxes, percentage depletion
in excess of basis, and interest income from private activity bonds (IRC [section]53(d)(1)(B)).
The amount of taxable royalties, but not land lease payments, may be reduced by a depletion deduction, calculated either under the percentage depletion
method or the cost depletion method.
For example, it does not include extension provisions related to the 100 percent-of-net-income limitation on percentage depletion
for oil and gas from marginal wells or brownfields environmental remediation expensing.
A qualified trade or business is any trade or business other than businesses that (1) provide personal or professional services; (2) own, deal in, or rent real property; (3) operate a farm; (4) operate a hotel, motel, restaurant, or similar business; (5) conduct banking, insurance, leasing, financing, investing, or a similar business; or (6) extract products subject to percentage depletion
in individual layers and total column.
was designed to increase overall oil and gas production and small petroleum producers.
As most investors will be permitted to take deductions for percentage depletion
on producing wells, otherwise taxable income (whether in the form of cash distributions from the oil and gas program or income from other sources of the taxpayer) will be "sheltered" to the extent of those deductions.
There are a number of deductions specific to the oil and gas industry, such as the ability to expense intangible drilling costs (IDCs) and to claim percentage depletion
instead of cost depletion.
If a taxpayer is eligible to take both percentage depletion
and cost depletion, the amount that results in the larger deduction must be taken.
The alternative to percentage depletion
is "cost depletion," which essentially bases the deduction on proration of the investor's basis in the property between the number of oil or gas units sold during the year and the number of estimated units remaining.