Cost Depletion

DEFINITION of 'Cost Depletion'

One of two accounting methods used to allocate the costs of extracting natural resources, such as timber, minerals and oil, and to take those costs as a tax deduction. Cost depletion looks at the total amount of the resource to be extracted, how much was extracted during the tax year and the amount of money spent to extract it. The proportion of resources extracted divided by the total resources is the percentage used to help determine the deduction in that period.

BREAKING DOWN 'Cost Depletion'

Depletion is similar to depreciation, which is used to allocate the cost of tangible assets like equipment over their useful lives. The other method of depletion is "percentage depletion", which is calculated by multiplying the gross income received in the tax year from extracting a resource by an IRS-determined percentage established for each resource (for example, if the percentage was 22%, you would multiply your gross income by 22%).



RELATED TERMS
  1. Depletion

    An accrual accounting method that companies use to allocate the ...
  2. Percentage Depletion

    A taxable deduction that assigns a set percentage of depletion ...
  3. Natural Capital

    A reference to the stock of natural resources, such as water ...
  4. Flat On A Failure

    Closing out a position and taking profits when the security in ...
  5. Reserves to Production Ratio

    A ratio indicating the remaining lifespan of a natural resource. ...
  6. Oil Reserves

    An estimate of the amount of crude oil located in a particular ...
Related Articles
  1. Options & Futures

    The Economics of Oil Extraction

    The overall economics of oil extraction is that there is money in it - both for extraction companies and their investors.
  2. Investing Basics

    Natural Resource Investing

    ETFs and futures are just some of the various investment options available to natural resource investors.
  3. Active Trading

    Oil As An Asset: Hotelling's Theory On Price

    Not sure where oil prices are headed? This theory provides some insight.
  4. Mutual Funds & ETFs

    Top 5 Natural Resources Mutual Funds (FSCHX, AWTAX)

    Discover which mutual funds in the natural resources category are top-rated funds, and understand why these funds may be suitable as part of a portfolio.
  5. Trading Strategies

    Key Ratios For Analyzing Oil And Gas Stocks: Introduction

    Oil and gas exploration and production (E&P) companies are unique from a valuation standpoint. Because of this, investors need to focus on a different subset of ratios to analyze the growth ...
  6. Stock Analysis

    This One-Of-A-Kind Energy Stock Could Double

    Frequently, the best road to success for a company is to do one thing really well -- preferably something nobody else does but that's in great demand all the same. #-ad_banner-#This is exactly ...
  7. Options & Futures

    The Real Estate of Oil

    When it comes to real estate, it is location, location, location - and a location with oil or gas underneath may be the most attractive type of all.
  8. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  9. Stock Analysis

    Canadian Natural Resources Analyst Day Review

    Canadian Natural Resources will spend most of its capital in 2011 on oil and liquids projects as the company goes after higher returns from its portfolio.
  10. Mutual Funds & ETFs

    Natural Resources ETF: IGE or GNR?

    Explore a comparison between IGE and GNR, and learn about the differences between the two ETFs, and their top holdings and sector allocations.
RELATED FAQS
  1. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Answer >>
  2. What other sectors are most similar to oil & gas drilling?

    Learn about sectors with companies that face similar challenges and rewards as the oil and gas drilling sectors. One example ... Read Answer >>
  3. What extent do interest rate changes have on the profitability of the oil and gas ...

    Learn how a change in interest rates can affect the profitability of companies in the oil and gas sector, through both input ... Read Answer >>
  4. How does analyzing an oil and gas's financial statements differ from companies in ...

    Learn how financial statements for oil and gas companies appear different from companies in other sectors, and discover how ... Read Answer >>
  5. How can growth investors benefit from investing in the oil & gas sector?

    Learn how the most important benefits incurred from growth investments are appreciation, compounding and a range of tax deductions. Read Answer >>
  6. How does fracking increase oil production?

    Learn how fracking, the process of high-pressure oil and gas extraction, has tripled domestic oil production and reduced ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center