2.2.2.2. Percentage Method
The percentage method avoids the problem of estimating the amount of underground reserves. This method multiplies the amount sold during the year by the market price of the resource. This annual gross income is then multiplied by a depletion allowance, a tax deduction determined by the IRS to compensate for the exhaustion of natural resources. The depletion allowance is different for different resources. In 2019, the depletion allowance was 15% for oil and gas, 10% for coal, and 22% for uranium.
Example: The mining company in the previous example had a gross income of $500,000, assuming a market price of $50/barrel (= 10,000 barrels x $50). Applying the oil depletion allowance of 15%, the company arrives at a depletion expense of $75,000.