Cost Depletion

One of two accounting methods used to allocate the costs of extracting natural resources, such as timber, minerals and oil, and to take those costs as a tax deduction. Cost depletion looks at the total amount of the resource to be extracted, how much was extracted during the tax year and the amount of money spent to extract it. The proportion of resources extracted divided by the total resources is the percentage used to help determine the deduction in that period.

Depletion is similar to depreciation, which is used to allocate the cost of tangible assets like equipment over their useful lives. The other method of depletion is "percentage depletion", which is calculated by multiplying the gross income received in the tax year from extracting a resource by an IRS-determined percentage established for each resource (for example, if the percentage was 22%, you would multiply your gross income by 22%).