1120-US: Adjustments account reduced by depletion (FAQ)

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Question

Why is the accumulated adjustments account reduced by depletion?

Answer

Depletion for oil and gas properties is not deducted on the S Corporation return. The S Corporation provides the information related to oil and gas well properties to the shareholders. Each shareholder then determines the allowable amount of depletion to deduct on their tax return.

One of the items listed in Regulation 1.1368-2(a)(3)(i) as a reduction to the accumulated adjustments account is the sum of the shareholder's deductions for depletion for any oil or gas property held by the corporation described in section 1367(a)(2)(E).

Under section 1367(a)(2)(E), the shareholder's stock basis is decreased by the shareholder's deduction for depletion for any oil and gas property held by the S Corporation, to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to the shareholder under section 613A(c)(11)(B).

UltraTax CS calculates the tentative depletion on the Oil/Gas Well Worksheet. The accumulated adjustments account is automatically reduced by the lesser of the tentative depletion, or the remaining adjusted basis of the well.

If the shareholder is not able to deduct their share of the depletion due to the taxable income limit, enter the amount in which the shareholder's stock basis should be reduced in the Oil and Gas Depletion field in Screen StmtS3 in the Review folder.

Related topic: 1120-US: Accumulated adjustments account and depletion FAQs

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