# Depletion Allowance: The Oil & Gas Owner's Tax Deduction Explained
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> The depletion allowance lets oil and gas mineral and royalty owners deduct a portion of income as reserves are produced — the mineral equivalent of depreciation. Cost vs. percentage depletion, the 15% rate, who qualifies (royalty owners do), the income limits, and what it means for owners. Educational only, not tax advice.

**URL:** https://www.buckheadenergy.com/depletion-allowance
**Source:** Buckhead Energy (https://www.buckheadenergy.com/)
**Generated:** 2026-08-16 (heuristic; server-side extraction)

## Answer
The depletion allowance is a federal income-tax deduction that lets an oil and gas mineral or royalty owner recover the capital value of a wasting mineral interest as the underlying reserves are produced and sold — the mineral-property equivalent of depreciation — under one of two methods, cost depletion or percentage depletion. Frequently asked questions What is the depletion allowance in simple terms? It is a tax deduction that lets oil and gas owners recover the value of their mineral interest as the reserves are produced — the mineral version of depreciation. It reduces the taxable portion of royalty or production income each year, under either cost depletion or percentage depletion. What is the difference between cost and percentage depletion? Cost depletion recovers your actual tax basis in the interest over the life of the reserves and can never exceed that basis. Percentage depletion deducts a fixed percentage of gross income from the property — generally 15% for oil and gas — and can, over time, exceed your original basis, which is why it is limited to certain taxpayers and capped. Qualifying owners generally take the larger of the two. Can royalty owners take the depletion allowance? Yes. Percentage depletion for oil and gas is restricted to independent producers and royalty owners (and denied to integrated majors) up to a depletable quantity of roughly 1,000 barrels per day, so individual mineral and royalty owners generally qualify. This "small producer / royalty owner exemption" is a deliberate feature of the tax code. What is the oil and gas depletion rate? The statutory percentage-depletion rate for oil and gas is generally 15% of the gross income from the property, subject to limits: the deduction generally cannot exceed 100% of the property's taxable income, and total percentage depletion generally cannot exceed 65% of the taxpayer's taxable income, with excess carried forward. Is the depletion allowance the same as a tax credit? No. Depletion is a deduction that reduces taxable income, not a credit that reduces tax dollar-for-dollar. Its benefit depends on your tax bracket, your basis, and the applicable limits. Because the rules are technical and change over time, a qualified oil and gas CPA should compute your actual depletion — this page is educational information only, not tax advice.

## Page Outline
- The Depletion Allowance for Oil and Gas Owners
  - What the depletion allowance is
  - Cost depletion vs. percentage depletion
  - Who qualifies — and why royalty owners can use it
  - The limits on percentage depletion
  - A simplified example
  - How depletion shows up for a royalty owner
  - What the depletion allowance means for mineral owners
  - Related reading
  - Frequently asked questions
  - Ready to Sell Your Mineral Rights?

## Related Pages
- [Oil & Gas Severance Tax by State](https://www.buckheadenergy.com/oil-gas-severance-tax-by-state)
- [Mineral Royalty Calculator](https://www.buckheadenergy.com/royalty-calculator)
- [How to Read a Royalty Statement](https://www.buckheadenergy.com/reading-royalty-statement)
- [Oil & Gas Encyclopedia — all terms](https://www.buckheadenergy.com/learn)

## About Buckhead Energy
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