12 — Depletion Updated for tax year 2025

What this line means

The deduction for the using up of natural resources your business extracts or harvests. Depletion applies to oil, gas, minerals, timber, and other natural deposits. It is similar to depreciation but for resources that are consumed rather than worn out. Most sole proprietors never use this line — it applies almost exclusively to businesses involved in natural resource extraction.

Does this apply to you?

• You own oil or gas wells and extract petroleum or natural gas
• You operate a mine or quarry and extract minerals, gravel, or stone
• You own timberland and harvest trees for commercial sale
• You extract any other natural resource from land you own or lease

Easy to overlook

Percentage depletion can exceed your cost basis Unlike depreciation, percentage depletion is not limited to what you paid for the resource. For certain oil, gas, and mineral properties, you can continue claiming depletion even after you have recovered your entire investment. This makes depletion one of the few deductions that can create a loss exceeding your actual cost. ¹ [SOURCE: IRS Publication 535 — Business Expenses]

Independent producers get percentage depletion on oil and gas Large integrated oil companies must use cost depletion, but independent producers and royalty owners can use percentage depletion (15% of gross income from the property). If you are a small operator with working interests in oil or gas wells, this is a significant tax advantage. ² [SOURCE: IRS Form 1040 Schedule C instructions — Line 12]

Watch out for this

Claiming depletion on land where you do not have an economic interest in the mineral or resource. Owning land does not automatically give you depletion rights — you must have an economic interest in the minerals being extracted. Landowners who receive fixed royalty payments may not qualify for depletion if the payment structure does not give them an economic interest.

Related lines on your return

• Line 13 — Schedule C — Depreciation; for equipment and buildings, not natural resources
• Form 4562 — Depreciation and Amortization; used to calculate both depreciation and depletion