Question

During the course of the previous year, a local shop had a gross income of $2,000. On this shop, there is a 6% depletion allowance. If the expenses given for the said shop, excluding depletion, of course, is $400, what would be the allowable depletion deduction?

Answer 1

The allowable statutory percentage depletion deduction is the lesser of net income or 15% of gross income. If net income is less than 15% of gross income, the deduction is limited to 100% of net income.

So, first limit = 2,000 × 15% = 300

Assuming this is maximum allowed-

Net Income = 2,000 - 400 - 300 = $1,300

Which is much higher than the first limit.

So our assumption is correct, 300 is maximum limit here.

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