Businesses are generally allowed to recoup capital costs associated with acquiring or creating an asset by deducting these costs from their taxable income. Typically, the costs are depreciated—deducted each year in proportion to the remaining useful life of the asset, corresponding to the income it generates. For natural resource assets, the costs of acquiring the reserve, such as the costs of the lease, are recovered through cost depletion—deducted in proportion to how much of the reserve has been depleted to generate income in a given year.
Instead of cost depletion, industries extracting fuels such as uranium, coal and oil shale are allowed to use percentage depletion. For these assets, companies can deduct a set percentage of the gross income generated from the asset, at rates ranging from 10 percent for coal and lignite, 15 percent for oil shale and geothermal deposits, and up to 22 percent for uranium. For coal and other fuels, except oil and gas, the amount that can be deducted is capped at 50 percent of the net income produced by the asset. Because the amount that can be deducted is not limited to the actual capital cost of acquiring the asset, companies can claim deductions in excess of their original investment in the asset.« Back to Database