Depletion Allowance Law and Legal Definition

Depletion Allowance is the tax deduction allowed by the IRS for royalty and mineral owners to offset the decrease in value of a capital investment caused by the production (depletion) of minerals.

These allowances were instituted by the Revenue Act of 1913 and derive from the Sixteenth Amendment, which allows the federal government to tax income, but not capital. The Revenue Act of 1926 allows owners or operators of mineral properties to calculate depletion as a percentage of gross income. As of 2001, the depletion allowance on mineral deposits may be calculated on either a cost or a percentage basis. Since 1975, however, integrated producers have not been allowed to calculate oil and gas depletion on a percentage basis.