Answer:
$175,000
Explanation:
Depletion per Unit =$3500000 / 500000 = $7 per unit
25,000 units were sold during the year.
There are two ways of figuring depletion on mineral property.
1. Cost Depletion
2. Percentage Depletion
Generally, we must use the method that gives you the larger deduction.
Calculation of Cost Depletion:
Cost Depletion = Units Sold * Depletion Rate = 25,000 units * $7 per unit = 175,000
Calculation of Percentage Depletion:
Percentage Depletion = Gross Income from Property During the Year * Depletion Rate = 800,000 * 22% = 176,000
Percentage Depletion cannot be more than 50% of net taxable income from the property.
Percentage Limit = (Sales - Expenses ) * 50% = (800,000 - 500,000) * 50% = 300000*50% = 150,000
Thus Percentage Depletion is limited to $150,000
Thus, the deduction is $175,000 (Higher to Cost or Percentage Depletion)
