Question

Last Chance Mine (LCM) purchased a coal deposit for $1,055,700. It estimated it would extract 15,300 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1.26 million, $10.8 million, and $9 million for years 1 through 3, respectively. During years 1–3, LCM reported net income (loss) from the coal deposit activity in the amount of ($18,900), $570,000, and $552,500, respectively. In years 1–3, LCM actually extracted 16,300 tons of coal as follows: (Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.)

(1)	(2)	Depletion (2)/(1)	Tons Extracted per Year
Tons of Coal	Basis	Rate	Year 1	Year 2	Year 3
15,300	$1,055,700	$69.00	2,900	9,300	4,100

b. What is LCM's percentage depletion for each year (the applicable percentage for coal is 10 percent)?

YEAR	PERCENTAGE DEPLETION
1
2
3

Answer 1

A. LCM’s cost depletion is $200,100 for year 1, $641,700 for year 2, and $213,900 for year 3, calculated as follows:
S.no	Particulars	Year 1	Year 2	Year 3	Explanation
1	Tons Extracted	2900	9300	4100
2	Depletion Rate	$              69.00	$                 69.00	$              69.00
	Cost Depletion expense	$ 2,00,100.00	$      6,41,700.00	$ 2,13,900.00	1x2
				*
	*This is the remaining basis. Under the cost depletion method, the taxpayer’s amortization is limited to the cost basis in the natural resource. The full amount of amortization would have been $282,900 if this were not the case.
B. LCM’s percentage depletion for each year is calculated as follows:
S.no	Particulars	Year 1	Year 2	Year 3	Explanation
1	Net Income from activity (before depletion expense)	$     -18,900.00	$      5,70,000.00	$   5,52,500.00	Given in problem
2	Gross Income	$ 12,60,000.00	$ 1,08,00,000.00	$ 90,00,000.00	Given in problem
3	Percentage	10%	10%	10%
4	Percentage depletion Expense before limit	$   1,26,000.00	$    10,80,000.00	$   9,00,000.00	(2)x(3)
5	50% of net Income limitation	$0	$      2,85,000.00	$   2,76,250.00	(1)x50%
	Allowable Percentage Depletion	$                    -	$      2,85,000.00	$ 2,76,250.00	Lesser of (4) or (5)
	Note that percentage depletion is not limited to the basis in the property.
C. Depletion expense is the greater of cost depletion or percentage depletion calculated as follows:
S.No	Tax Depletion Expense	Year 1	Year 2	Year 3	Explanation
1	Cost Depletion	$   2,00,100.00	$      6,41,700.00	$   2,13,900.00	Part-A
2	Percentage depletion	$                    -	$      2,85,000.00	$   2,76,250.00	Part-B
	Deductible Depletion expense	$   2,00,100.00	$      6,41,700.00	$   2,76,250.00	Greater of (1) or (2)

LCM's Percentage Depletion:

Year Percentage depletion

1 $0

2 $285,000

3 $276,250