Qualified Business Income and Percentage Depletion Interaction

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about many changes in the tax code, including the introduction of new provisions.  Luckily, deductions available to taxpayers in the oil and gas industry have survived tax reform and will continue to make oil and gas a favorable investment from a tax perspective.  One of the new provisions, the qualified business income deduction under IRC section 199A, has raised questions regarding the interaction between the new potential 20% deduction and the percentage depletion deduction familiar to oil and gas investors. 

In its simplest form, section 199A allows for a deduction up to 20% of a taxpayer's qualified business income (QBI) from a trade or business operated as a non-C-corporation entity. The deduction is claimed as a reduction to taxable income on the taxpayer's return. 

Percentage depletion allows a taxpayer to deduct 15% of the gross income (less royalties) derived in a trade or business from an oil and gas property. For non-C-corporation taxpayers, the depletion deduction is claimed on the partner or shareholder's return, where limitations may apply. One limitation is that the taxpayer's percentage depletion deduction may not exceed 65% of his/her taxable income.  

P.L. 115-97, issued on December 22, 2017, amended IRC Section 613A to clarify that the 65% of taxable income limitation should be computed without regard to qualified business income deduction.  This proves to be very favorable to taxpayers, as it does not reduce the potential depletion deduction and taxpayers can enjoy a potential deduction of up to 20% on qualified business income.  For more information on either deduction, please contact a Schneider Downs Tax Advisor.   


You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Impact to Oil Prices following the OPEC Deal
Pennsylvania Oil and Gas Industries Respond to State Joining RGGI
Ohio’s New Budget
Supreme Court Ruled State Request for Donor Information Unconstitutional
Applying for Federal Income Tax Exemption?
IRS Experiencing Delays: Exempt Organizations are Encouraged to e-file Forms 8868 and 990-ez
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us
Map of Pittsburgh Office

One PPG Place, Suite 1700
Pittsburgh, PA 15222

[email protected]
p:412.261.3644     f:412.261.4876

Map of Columbus Office

65 East State Street, Suite 2000
Columbus, OH 43215

[email protected]
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102

[email protected]

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.