The oil depletion allowance in American (US) tax law is a tax break claimable by anyone with an economic interest in a mineral deposit or standing timber.[citation needed] The principle is that the asset is a capital investment that is a wasting asset, and therefore depreciation can reasonably be offset (effectively as a capital loss) against income.
The allowance encouraged people who were taxed at a high marginal rate to invest in, perhaps risky, oil ventures. If the venture failed, then the costs would effectively reduce income, so the effective loss at a 90% marginal rate would only be 10% of the actual investment. Conversely if the venture was successful, an amount up to initial investment (under cost depletion, see below) would be tax free. Under the percentage depletion method the amount could potentially be even greater.[1]
The oil depletion allowance has been subject of interest because one method (percentage depletion) of claiming the allowance makes it possible to write off more than the whole capital cost of the asset.[2]
- ^ "How Big Oil clings to billions in government giveaways".
- ^ Cite error: The named reference
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