Q&A with the Pennsylvania Department of Revenue
When will the Department issue guidelines regarding the deductibility of depletion and intangible drilling cost?
The department’s current policies on the deductibility of depletion and intangible drilling costs have not changed. The policy with respect to depletion is located in 61 PA Code §§ 125.51 and 125,52 which are as follows:
§ 125.51. Allowance of deduction for cost depletion.
(a) General rule. In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be allowed as a deduction in computing income a reasonable allowance for depletion. In any case in which it is ascertained as a result of operations or development work that the recoverable units are greater or less than the prior estimate thereof, the prior estimate (but not the basis for depletion) shall be revised and the allowance under this section for subsequent taxable years shall be based on the revised estimate.
(b) Recoverable units. Recoverable units are the number of units (for example—tons, pounds, ounces or barrels) of minerals, oil or gas in the ground and economically worth extracting, estimated according to the best available information and industry standards.
(c) Special rules.
(1) Leases. In the case of a lease, the deduction under this section shall be apportioned between the lessor and lessee in accordance with Federal Income Tax requirements.
(2) Life tenant and remainderman. In the case of property held by one person for life with remainder to another person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.
(3) Property held in trust. In the case of property held in trust, the deduction under this section shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of those provisions, on the basis of the trust income allocable to each.
(4) Property held by estate. In the case of a decedent’s estate, the deduction under this section shall be apportioned between the estate and the heirs, legatees and devisees on the basis of the income of the estate allocable to each.
(5) Basis for depletion. The basis on which depletion is to be allowed in respect of any property shall be the adjusted basis for the purpose of determining the gain upon the sale or other disposition of the property.
The provisions of this § 125.51 adopted February 24, 2006, applies for taxable years beginning on or after January 1, 2005, 36 Pa.B. 959; corrected March 11, 2006, 36 Pa.B. 1130.
§ 125.52. Percentage depletion.
(a) Deduction. A deduction for percentage depletion shall be allowed only in the following set of circumstances:
(1) The deduction is allowable in computing Federal taxable income.
(2) Insufficient information is available to estimate the amount of recoverable units in accordance with industry standards.
(3) The cost of the recoverable units is fixed and certain.
(4) The cost of the recoverable units has not been fully recovered.
(b) Effective date. This section will apply for taxable years beginning on or after January 1, 2005.
The provisions of this § 125.52 adopted February 24, 2006, applies for taxable years beginning on or after January 1, 2005, 36 Pa.B. 959; corrected March 11, 2006, 36 Pa.B. 1130.
The department’s current policy regarding intangible drilling costs (IDCs) is that IDCs associated with an actively producing well must be amortized over the life of the well. IDCs for dry holes or those where the well is shut down due to lack of sufficient production, may be utilized on a PA personal income tax return or reported on a PA partnership or S corporation return as a loss on PA Schedule D. This policy is included in the PA PIT guide in Chapter 11.
Although internal discussions have been ongoing for some time regarding possible changes to the IDC policy and a draft bulletin was prepared for those discussions, no changes have been approved or finalized. The department will consider input from outside sources, including PICPA, prior to the publication of a new policy with respect to intangible drilling costs.