If you take percentage depletion on gravel mined and paid as royalties, is there a limit on the amount of depletion taken such as no more than basis or is it unlimited? I have been taking 5% per year based on the royalties.

As of 2001, the depletion allowance on mineral deposits may be calculated on either a cost or a percentage basis, known as the percentage of depletion method. The percentage of depletion method, also known as the statutory method does not employ recovery of cost in the computation of the deduction.

What is the percentage of depletion method?
This method is based on the percentage of annual income, rather than cost, and this amount is deductible each year, even if the owner has recovered all cost or discovery value of the depletable asset.

The Percentage depletion clearly provides an extremely profitable allowance as an alternative to cost depletion method. "The taxpayer calculates a fixed percentage of his or her gross income and deducts that amount from gross income annually for as long as the property generates income, even after he or she has completely recovered the actual cost."

Thus, to answer your question, there is no limit on the amount of depletion taken as long as the property generates income!

A detailed discussion on this subject can be found on Publication 535 chapter 9, which can be assessed by clicking on the following IRS website at;

Publication 535 (2007), Business Expenses

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