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Which of the following statements about the depletion deduction is false? A. Firms can deduct the...

Which of the following statements about the depletion deduction is false?
A. Firms can deduct the greater of cost depletion or percentage depletion for the year.
B. Percentage depletion is a tax preference item.
C. The depletion deduction can never exceed the unrecovered cost basis in the depletable asset.
D. Percentage depletion is not based on any actual decrease in the expected productive value of a mine or well.

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Answer #1

C. The depletion deduction can never exceed the unrecovered cost basis in the depletable asset.

Depletion deduction is tax deduction used to compensate for using up natural resource deposits as oil, iron, timber, etc. The allowance as cost recovery is not taxable.

Coming back to question, the total of depletion deductions can be indeed more than the cost of asset but it does not represent much of cost recovery deduction. However, it is a tax deduction favoured by lawmakers. So, depletion deduction can’t exceed unrecovered cost basis in the depletable asset.

Hence, the correct option is c.

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