Oil Depletion Allowance Law and Legal Definition

Oil Depletion Allowance refers to deductions allowed in petroleum industry taxation. Mineral resources, including oil and gas, are finite and may become exhausted from area to area. Although difficult to estimate the amount of the deposit left, the allowance takes into account that production of a crude oil uses up the asset. Depletion deductions provide incentives to stimulate investment in oil discovery in hazardous or financially risky areas. The deduction, a fixed percentage of sales, is subtracted from a business' gross income, thus lowering its taxable income.

The oil depletion allowance has been an integral part of the U.S. taxation system applied to oil since the end of World War I (1916–1918). First called the "discovery depletion," the allowance evolved to the "percentage depletion" in 1926 when, regardless the amount invested, corporations deducted a specific percentage of total sales.