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?
A)$15,000
B)$23,000
C)$25,000
D)$0
E)None of these

Question

Quizplus · Accepted Answer

Eula's percentage depletion deduction for regular income tax purposes is $30,000 ($200,000 × 15%)prior to the application of the 50% limit which is $25,000 ($50,000 × 50%).So the amount for percentage depletion is limited to $25,000.Since this amount is greater than the cost depletion of $19,000,the depletion deduction is $25,000.The tax preference is the excess of the $25,000 deduction over the $23,000 basis for the mineral property.This results in a preference of $2,000 ($25,000 percentage depletion - $23,000 basis at beginning of year).

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