Tony has owned an oil and gas property for a number of years. The following information is provided about the property’s operations in the current year:
Gross income ………………………………………………….$500,000
Minus: Expenses (including IDCs of $100,000) ……………..(300,000)
Taxable income (before depletion) ……………………………$200,000
Cost depletion (if IDCs are expensed) ………………………. $ 20,000
Cost depletion (if IDCs are capitalized) ……………………… $ 30,000
a. What is the percentage depletion amount if the IDCs are expensed?
b. What is the percentage depletion amount if the IDCs are capitalized?
c. What is the depletion deduction amount assuming that the IDCs are expensed?
d. Based on the information above, which method should be used for the IDCs? Explain.