E-15 Test results for sled motors.

[Hoosier]

While I think that "set aside" farming was designed to keep farmers from over producing and driving the price of the product they produce down to a point where the "small guy" got squeezed out, clearly we don't need it anymore and it should be tossed.

However, if we are going to talk about tax breaks...let's in fairness take a good look at what oil companies get to do....

"Depletion is the using up of a natural resource by mining, quarrying, drilling, or felling. Depletion allowance, then, is the allowance available through the IRS code allowing an owner to account for the reduction (production) of reserves as a product is produced and sold. .... the depletion allowance we are concerned with is the depletion allowance associated with the production of oil and/or gas. The depletion allowance, like depreciation, is a form of cost recovery for capital investments. There are two ways of calculating depletion allowance: cost depletion and percentage depletion. Oil and gas royalty owners have the availability of using either, yet for mineral properties you must generally use the method that gives you the larger deduction.If you have an economic interest in mineral property (which includes royalty income), you can take a deduction for depletion.

With cost depletion, a taxpayer recovers the actual capital investment throughout the period of income production. Each year, the taxpayer deducts a portion of the original capital investment, less previous deductions, that is equal to the fraction of the estimated remaining recoverable reserves that have been produced and sold that year. The cumulative amount recovered under this method can never exceed the taxpayer’s original capital investment.

Under percentage depletion, the deduction for the recovery of one’s capital investment is a fixed percentage of the gross income (sales revenue) from the sale of the oil or gas. For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of the gross income based on your average daily production of crude oil or natural gas, up to your depletable oil or natural gas quantity. An attractive element of percentage depletion is that the cumulative depletion deductions may be greater than the capital amount spent by the taxpayer to acquire the property." (underlining is mine)

There is a taxable income limit for oil and gas royalty owners. Your annual deduction for percentage depletion is limited to the smaller of the following:

• 100% of your taxable income from the property figured without the deduction for depletion
• 65% of your taxable income from all sources, figured without the depletion allowance.

More specific details on this topic can be found in IRS Publication 535."

>>Good to know that these poor oil companies can write off up to 100% of their profits...and if you doubt they don't think again....they likely pay less income tax than YOU do. But try and do away with some of these fat write-offs from farmers to oil companies and you will face a wrath that will likely put you out of office if you are a congressman.
Funds will fill

I don't see how this is any different than how the tax code treats depreciation of any asset purchased and used up during production. Like it says above, this is a method for cost recovery for a capital investment. Is it more accelerated than a typical depreciation schedule?

I'll fully admit I don't understand why oil and gas prices are so high right now. Seems like it's a market that isn't functioning how it should be if left simply to supply and demand (I don't know if the problem is Wall Street/speculators, the oil companies, global markets, the government (tax code or ethanol requirements), or all of the above), but I don't think the tax code on how depreciation/depletion is calculated is the cause of it).

 

[anonomoose]

I don't see how this is any different than how the tax code treats depreciation of any asset purchased and used up during production. Like it says above, this is a method for cost recovery for a capital investment..... .

This isn't on the equipment to pump it or drill it, it is on the crude itself as it gets depleted out of the ground. While they can depreciate the equipment to get the oil, and nobody should begrudge them on that, depletion allowance is depreciation on the product you pump out. It's a sweet deal...pump it sell it and get tax breaks as the well gets pumped dry.

It is like depreciating corn in the field as the field gets stripped of corn.

 

[Hoosier]

This isn't on the equipment to pump it or drill it, it is on the crude itself as it gets depleted out of the ground. While they can depreciate the equipment to get the oil, and nobody should begrudge them on that, depletion allowance is depreciation on the product you pump out. It's a sweet deal...pump it sell it and get tax breaks as the well gets pumped dry.

It is like depreciating corn in the field as the field gets stripped of corn.

But to make sure example comparable, wouldn't you have to assume you bought the corn fully grown and then you get to expense that cost when you sell it (such that the farmer bought the corn as opposed to buying the land and then further invested all the capital into growing the corn). Not sure if that makes sense. When an oil company buys land, it is buying based on an estimate of the crude the land contains (excuse my lack of terminology). The estimated amount of the crude is the asset the capital is invested for. When the crude comes out of the ground, then the asset is depleted and the associated costs are allowed to be depleted/amortized/depreciated for tax purposes as well. Seems reasonable to me, unless the devil's in the details and I'm missing something.

Why "investors" are allowed to speculate in oil/gas they never take delivery of and isn't tangible to their business is what doesn't make sense to me. But I'm open to other opinions if someone can explain why it is good for the economy that they are allowed to do so.

 

[anonomoose]

But to make sure example comparable, wouldn't you have to assume you bought the corn fully grown and then you get to expense that cost when you sell it (such that the farmer bought the corn as opposed to buying the land and then further invested all the capital into growing the corn). Not sure if that makes sense. When an oil company buys land, it is buying based on an estimate of the crude the land contains (excuse my lack of terminology). The estimated amount of the crude is the asset the capital is invested for. When the crude comes out of the ground, then the asset is depleted and the associated costs are allowed to be depleted/amortized/depreciated for tax purposes as well. Seems reasonable to me, unless the devil's in the details and I'm missing something.

Why "investors" are allowed to speculate in oil/gas they never take delivery of and isn't tangible to their business is what doesn't make sense to me. But I'm open to other opinions if someone can explain why it is good for the economy that they are allowed to do so.

It is rare for an oil company to buy land...unlike a farmer. They lease land wih mineral rights and fully deduct that cost from the cost to produce. But so does a farmer....he can lease too, but he can't do depreciation on the goods he produces from the leased land can he? Oil companies depreciate on depleation of the goods they are "harvesting" based upon an estimation of what the well will produce overall. This can easily exceed the lease cost, and equipment to withdraw the goods.

I am not sure how a farmer can get this much tax right off and in fact other than crop insurance never knows how much crop he will even harvest.

To share in the wealth, investors can take some of the depletion allowance against the income in the form of profits. It's a sweet deal. This is akin to tobacco companies who have "agreed" to be taxed and pass on the revenue stream to states who are cash starved and therefore not as likely to continue to battle them on production and sale.

Of course this al comes at the expense of the rest of us.

 

[Hoosier]

Oil companies depreciate on depleation of the goods they are "harvesting" based upon an estimation of what the well will produce overall. This can easily exceed the lease cost, and equipment to withdraw the goods.

This is the part that I don't get - if the oil company leases the land and is allowed to take depreciation/depletion in excess of the lease cost, I agree that wouldn't be right and doesn't make sense. Can they do this over the life of the lease or is just accelerated in the early years of the lease? The total depreciable asset they are leasing at the inception of the lease should be an amount equal to the present value of the total lease payments, and that should be the maximum they are allowed to depreciate/deplete over the life of the lease.

 

[anonomoose]

This is the part that I don't get - if the oil company leases the land and is allowed to take depreciation/depletion in excess of the lease cost, I agree that wouldn't be right and doesn't make sense. Can they do this over the life of the lease or is just accelerated in the early years of the lease? The total depreciable asset they are leasing at the inception of the lease should be an amount equal to the present value of the total lease payments, and that should be the maximum they are allowed to depreciate/deplete over the life of the lease.

They can lease for a dollar and it doesn't matter...they tell us how big the pocket of oil is and depreciate it based upon the remaining balance of oil left in the ground. This is definitely a condensed version of this tax write off but is the bulk of the truth.

If a farmer tried to depreciate the balance of his corn crop as he harvested he would hear from the IRS in a hurry.

If you depreciated your car/truck/ or sled over the miles you drove and got more than the cost of the vehicle back....you would buy 10 sleds at a time wouldn't you?

I am thinking of depreciating my dog....his life is short and the costs are enormous including milk bones and shampoo. Of course you have the vehicle to get him to and back from the vet, and grocery store to buy the food he eats, and I have to pay my wife to suck up the loose hair with the most expensive super sucker ever made, and the list goes on....... Multiply this times a billion or two and you have your own oil business.

 

[old abe]

Glad to hear from someone who pays attention to our tax code! Always pays to pay attention!