Engineering Economic Analysis

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362 DEPRECIATION

A coal mine has a gross income of $250,000 for the year. Mining expenses equal $210,000.

Compute the allowable percentage depletion deduction.

!.SOU..J.tION'

From Table 11-6, coal has a 10% depletion allowance. The percentage depletion deduction is

computed from gross mining income. Then the taxable income must be computed. The allowable

percentage depletion deduction is limited to the computedpercentage depletion or 50% of taxable

income, whichever is smaller.

Computed PercentageDepletion

Gross income from mine

Depletion percentage

Computed percentage depletion

TaxableIncome Limitation

Gross income from mine

Less:Expenses other than depletion

Calculation of Taxable Income

Deduction limitation

Taxable Income of Individuals

$250,000

x 10%

$ 25,000

$250,000

-210,000

40,000

x 50%

$20,000

Since the taxable income limitation ($20,000) is less than the computed percentage depletion

($25,000), the allowablepercentage depletion deduction is $20,000.

As previously stated, on mineral property and some oil and gas wells (small producers

only), the depletion deduction can be based on either cost or percentage depletion. Each

year, depletion is computed by both methods, and the allowable depletion deduction is the

larger of the two amounts. '.

Spreadsheets and Depreciation

The spreadsheet functions for straight-line, double declining balance, and sum-of-years'-

digits depreciation are listed in Table 11-7. Because these techniques are simple and were

Depreciation Technique

TABLE 11-7 Spreadsheet Functions for Depreciation

Excel

Straight line

Declining balance

Sum of years' digits

MACRS

SLN(cost, salvage, life)

DDB(cost, salvage, life, period, factor)

SYD(cost, salvage, life, period)

VDB(cost, salvage, life, start-period, end_period, factor, no-switch)