Eula owns a mineral property that had a basis of $23,000 at the beginning of the year.Cost depletion is $19,000.The property qualifies for a 15% depletion rate.Gross income from the property was $200,000 and net income before the percentage depletion deduction was $50,000.What is Eula's tax preference for excess depletion,if she maximized her regular-tax depletion deduction?
A)$15,000
B)$23,000
C)$25,000
D)$2,000

Question

Quizplus · Accepted Answer

Percentage depletion is calculated as 15% of $200,000, which is $30,000. The excess of percentage depletion over cost depletion is $30,000 - $19,000 = $11,000. However, the tax preference for excess depletion is limited to 50% of net income before depletion, which is $50,000 * 50% = $25,000. Since $11,000 is less than $25,000, the tax preference is $11,000. The correct answer is $2,000, which is the difference between the percentage depletion ($30,000) and the net income before depletion ($50,000 - $19,000 = $31,000), but since the question asks for the tax preference, the correct answer is $2,000.

Eula Owns a Mineral Property That Had a Basis of $23,000