Origin: An essential characteristic of a business income tax is that it is imposed on the net of business receipts over deductible business expenses. However, an immediate deduction is generally not allowed for the full cost of investments in natural resources such as mineral, natural gas or oil deposits. Rather, the cost of the natural resource property is required to be recovered over time as the natural resources are depleted by extraction. Traditional financial accounting and tax accounting rules base cost recovery on the percentage of the volume of natural resources extracted in a year over the estimated total volume of natural resources included in the investment. This traditional cost recovery method is referred to as the "cost-depletion" method. Internal Revenue Code (Code) § 613 gives taxpayers the option to use an alternative cost recovery method for investments in natural resource property. The alternative method is referred to as "percentage depletion." Under this method the deduction for cost recovery is based on a percentage of the income generated by the natural resource property. Specially, percentage depletion permits deduction of a statutory percentage of gross income from natural resource property, and bears no relationship to cost or other basis. In fact, an allowance calculated under percentage depletion is deductible even when the taxpayer's adjusted basis in the property is zero, provided that the taxpayer has gross income from the property. The statutory percentage of gross income allowed as a deduction depends on the type of natural resource that is extracted. The percentages range from 22% for sulfur, uranium and other designated minerals including most metals, to 5% for sand and gravel. See Code § 613(b). The deduction may not exceed 50% (in some cases, 100%) of net income from the property. The percentage depletion method is not available to large, integrated oil companies or for natural gas resources located outside the US. See Code §§ 613(d), 613A. Due to Massachusetts' reliance on the Internal Revenue Code (Code) for purposes of determining income, taxpayers must recover the cost of natural resource property in the same manner and in the same amount as they do for federal tax purposes. Thus, Massachusetts permits the use of the percentage depletion method if it is used for federal tax purposes. The percentage depletion method often results in a larger deduction than traditional cost depletion method. The excess of the deduction determined using the percentage depletion method over the deduction using the cost depletion method constitutes a tax expenditure.
Origin: IRC §§613, 613A; M.G.L. c. 63, §30.3
Corporate Excise Tax
Deductions from Gross Income
2.204
Excess Natural Resource Depletion Allowance
An essential characteristic of a business income tax is that it is imposed on the net of business receipts over deductible business expenses. However, an immediate deduction is generally not allowed for the full cost of investments in natural resources such as mineral, natural gas or oil deposits. Rather, the cost of the natural resource property is required to be recovered over time as the natural resources are depleted by extraction. Traditional financial accounting and tax accounting rules base cost recovery on the percentage of the volume of natural resources extracted in a year over the estimated total volume of natural resources included in the investment. This traditional cost recovery method is referred to as the "cost-depletion" method. Internal Revenue Code (Code) § 613 gives taxpayers the option to use an alternative cost recovery method for investments in natural resource property. The alternative method is referred to as "percentage depletion." Under this method the deduction for cost recovery is based on a percentage of the income generated by the natural resource property. Specially, percentage depletion permits deduction of a statutory percentage of gross income from natural resource property, and bears no relationship to cost or other basis. In fact, an allowance calculated under percentage depletion is deductible even when the taxpayer's adjusted basis in the property is zero, provided that the taxpayer has gross income from the property. The statutory percentage of gross income allowed as a deduction depends on the type of natural resource that is extracted. The percentages range from 22% for sulfur, uranium and other designated minerals including most metals, to 5% for sand and gravel. See Code § 613(b). The deduction may not exceed 50% (in some cases, 100%) of net income from the property. The percentage depletion method is not available to large, integrated oil companies or for natural gas resources located outside the US. See Code §§ 613(d), 613A. Due to Massachusetts' reliance on the Internal Revenue Code (Code) for purposes of determining income, taxpayers must recover the cost of natural resource property in the same manner and in the same amount as they do for federal tax purposes. Thus, Massachusetts permits the use of the percentage depletion method if it is used for federal tax purposes. The percentage depletion method often results in a larger deduction than traditional cost depletion method. The excess of the deduction determined using the percentage depletion method over the deduction using the cost depletion method constitutes a tax expenditure.
IRC <a href="https://www.law.cornell.edu/uscode/text/26/613" target="_blank">§§613</a>, <a href="https://www.law.cornell.edu/uscode/text/26/613A" target="_blank">613A</a>; M.G.L. <a href="https://malegislature.gov/Laws/GeneralLaws/PartI/TitleIX/Chapter63/Section30" target="_blank">c. 63, §30.3</a>
2.8
3.7
4.0
3.7
3.6
