Article: 50247

Overview

Depletion is the process of accounting for the reduction in natural resources through mining, drilling, quarrying, or timber harvesting. The IRS allows taxpayers who hold an economic interest in a mineral deposit or standing timber to claim a depletion deduction, which reduces taxable income accordingly.

There are two methods to calculate the depletion deduction: cost depletion and percentage depletion. You must use the method that provides the greater deduction. The percentage depletion rate varies based on the type of mineral being extracted.

Adding Oil and Gas Depletion

Before you add depletion, you must view the return to see the amount calculated for “Taxable income,” of Form 1040 and note this amount. Then follow these steps:

1. Go to Federal Taxes.
2. Click Review.
3. Click I’d like to see the forms I’ve filled out or search for a form.
4. Enter Oil in the search box and click on Oil and Gas Depletion Worksheet to add and open the form.
5. Enter the amount that you noted above in the line Taxpayer’s taxable income before depletion deduction.
6. In the For box, select one of the following:
   • C – Schedule C, Profit or Loss From Business
   • E – Schedule E, Supplemental Income and Loss
   • K1P – 1065, Schedule K-1
   • K1S – 1120S, Schedule K-1
7. Enter the rest of your information and click Save.

Further Information

Oil & Gas Audit Technique Guide

Internal Revenue Bulletin: 2021-19