Tina acquires an oil and gas property interest for $200,000 in the current year. The following information about current year operations is supplied for purposes of computing the amount of Tina’s depletion and intangible drilling and development cost (IDC) deductions:
Estimated recoverable units ………………………… 20,000
Units produced …………………………………….. 6,000
Units sold ………………………………………….. 4,000
IDCs ……………………………………………….. $20,000
Percentage depletion (after limitations) ……………. $25,000
a. What is the cost depletion amount if the IDCs are expensed?
b. What is the cost depletion amount if the IDCs are capitalized?
c. How much depletion is deducted on the tax return?
d. Should the IDCs be capitalized or expensed? Explain.