How to Calculate Cost Depletion Deduction for Santa Fe?

What is the process to calculate cost depletion deduction for Santa Fe?

Given that Santa Fe purchased the rights to extract turquoise on a tract of land for $924,000 and estimates to recover 11,000 pounds of turquoise, how can we determine Santa Fe's cost depletion deduction? During the current year, Santa Fe extracted 3,300 pounds of turquoise and sold it for $587,000. What is Santa Fe's cost depletion deduction for the current year?

Santa Fe's Cost Depletion Deduction

Santa Fe's cost depletion deduction for the current year is $277,200.

Santa Fe's cost depletion deduction for the current year can be calculated as follows. First, we need to determine the depletion rate per pound of turquoise. To do this, we divide the total cost of extraction rights ($924,000) by the estimated recoverable pounds of turquoise (11,000 pounds). This gives us a depletion rate of $84 per pound of turquoise. Next, we can calculate the depletion expense for the current year by multiplying the depletion rate by the number of pounds extracted during the year (3,300 pounds). This gives us a depletion expense of $277,200 for the current year. Finally, we can use this depletion expense to calculate the cost depletion deduction. This deduction is limited to the lesser of the depletion expense or the gross income from the property during the year. In this case, the gross income from the sale of turquoise was $587,000. Therefore, the cost depletion deduction for the current year is $277,200, which is the lesser of the two amounts.