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1040 E File

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1040 E File

1040 e file Car Expenses Table of Contents Introduction Depreciation of CarSpecial Depreciation Allowance Depreciation Limit Amended Return Election Not To Claim Special Allowance If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual car expense method, new law contains provisions that may affect your depreciation deduction for that car. 1040 e file Publication 463, Travel, Entertainment, Gift, and Car Expenses, contains information on figuring depreciation on your car. 1040 e file However, Publication 463 does not contain the new provisions because it was printed before the law was enacted. 1040 e file The new provisions are in the Supplement to Publication 463, which is reprinted below. 1040 e file Supplement to Publication 463 Travel, Entertainment, Gift, and Car Expenses   Introduction This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible expenses, including a deduction for depreciation, using the actual car expense method. 1040 e file After Publication 463 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. 1040 e file Certain provisions of this new law may reduce your taxes for 2001. 1040 e file The new law contains the following provisions. 1040 e file A new depreciation deduction, the special depreciation allowance. 1040 e file An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance. 1040 e file If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. 1040 e file See Amended Return, later. 1040 e file Depreciation of Car If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally can claim a depreciation deduction. 1040 e file However, there is a limit on the depreciation deduction you can take for your car each year. 1040 e file See Depreciation Limit later. 1040 e file Special Depreciation Allowance The new law allows you to claim a special depreciation allowance. 1040 e file This special allowance is a deduction equal to 30% of the depreciable basis of qualified property. 1040 e file You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). 1040 e file See Depreciation Deduction under Actual Car Expenses in chapter 4 of Publication 463 for information about MACRS. 1040 e file You can claim the special depreciation allowance only for the year the qualified property is placed in service. 1040 e file Qualified property. 1040 e file   Qualified property includes a car (any four-wheeled vehicle, including a truck or van not more than 6,000 pounds, that is made primarily for use on public streets, roads, and highways) that meets all of the following requirements. 1040 e file You bought it new. 1040 e file You bought it after September 10, 2001. 1040 e file (But a car is not qualified property if a binding written contract for you to buy the car was in effect before September 11, 2001. 1040 e file ) You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use. 1040 e file Example. 1040 e file Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. 1040 e file Bob's car is qualified property. 1040 e file Bob chooses not to take a section 179 deduction for the car. 1040 e file He does claim the new special depreciation allowance. 1040 e file Bob first must figure the car's depreciable basis, which is $15,000 ($20,000 × . 1040 e file 75). 1040 e file He then figures the special depreciation allowance of $4,500 ($15,000 × . 1040 e file 30). 1040 e file The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year convention) and results in a deduction of $2,100 ($10,500 × . 1040 e file 20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100). 1040 e file However, Bob's depreciation deduction is limited to $5,745 ($7,660 × . 1040 e file 75), as discussed next. 1040 e file Depreciation Limit The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you claim the special depreciation allowance. 1040 e file The limit is increased to $23,080 if the car is an electric car. 1040 e file The section 179 deduction is treated as depreciation for purposes of this limit. 1040 e file If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of business and investment use during the year. 1040 e file For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for electric cars). 1040 e file Amended Return If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U. 1040 e file S. 1040 e file Individual Income Tax Return, by April 15, 2003. 1040 e file At the top of the Form 1040X, print “Filed pursuant to Revenue Procedure 2002–33. 1040 e file ” If you are an employee, attach Form 2106, Employee Business Expenses (revised March 2002). 1040 e file If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002). 1040 e file Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. 1040 e file For details, see Revenue Procedure 2002–33. 1040 e file (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than attaching Form 3115 to your 2002 return. 1040 e file ) You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the election not to claim it described later. 1040 e file Example. 1040 e file The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000 ($20,000 x . 1040 e file 75 x . 1040 e file 20) depreciation deduction for his new car using MACRS. 1040 e file Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. 1040 e file Bob, who is an employee, files Form 1040X, by April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the earlier example. 1040 e file Bob's new filled-in Form 2106 is shown later. 1040 e file Election Not To Claim Special Allowance You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return indicating that you are electing not to claim the special depreciation allowance for 5-year property. 1040 e file As a general rule, you must make this election by the due date (including extensions) of your return. 1040 e file You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended return. 1040 e file To get this extension, you must have filed your original return by the due date (including extensions). 1040 e file At the top of the statement, print “Filed pursuant to section 301. 1040 e file 9100–2. 1040 e file ” If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during the same year. 1040 e file Unless you elect (or are treated as electing) not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. 1040 e file Deemed election for return filed before June 1, 2002. 1040 e file   If you did not make the election not to claim the special depreciation allowance in the time and manner described above, you will still be treated as electing not to claim it if all of the following apply. 1040 e file You filed your 2001 return before June 1, 2002. 1040 e file You claimed depreciation on your return but did not claim the special depreciation allowance. 1040 e file You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation allowance. 1040 e file Form 2106, Page 1, for Bob Smith Form 2106, Page 2, for Bob Smith Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in Montana

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

 City Street Address  Days/Hours of Service  Telephone* 
Billings  2900 4th Ave. N.
Billings, MT 59101 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)

 

Services Provided

(406) 247-7446 
Bozeman  1805 S. 22nd Ave.
Bozeman, MT 59718 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(406) 582-8671 
Great Falls  11 5th St. N.
Great Falls, MT 59401 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(406) 761-8095 
Helena  10 W. 15th St., Ste. 2300
Helena, MT 59626 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(406) 441-1039 
Kalispell  275 Corporate Ave.
Kalispell, MT 59901 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:00 a.m. - 12:00 noon)

 

Services Provided

(406) 752-6636 
Missoula  2681 Palmer St.
Missoula, MT 59808 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
 

Services Provided

(406) 728-9127 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses). 

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call 406-444-8668 in the Helena area or 1-877-777-4778 elsewhere, or see Publication 1546, The Taxpayer Advocate Service of the IRS.

For further information, see Tax Topic 104

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
10 W. 15th, STE 2300
 MS 6610-HLN
Helena, MT 59626

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The 1040 E File

1040 e file 9. 1040 e file   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. 1040 e file Depletion unit. 1040 e file Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. 1040 e file The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. 1040 e file There are two ways of figuring depletion: cost depletion and percentage depletion. 1040 e file For mineral property, you generally must use the method that gives you the larger deduction. 1040 e file For standing timber, you must use cost depletion. 1040 e file Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. 1040 e file More than one person can have an economic interest in the same mineral deposit or timber. 1040 e file In the case of leased property, the depletion deduction is divided between the lessor and the lessee. 1040 e file You have an economic interest if both the following apply. 1040 e file You have acquired by investment any interest in mineral deposits or standing timber. 1040 e file You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. 1040 e file A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. 1040 e file A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. 1040 e file Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. 1040 e file Basis adjustment for depletion. 1040 e file   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. 1040 e file Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). 1040 e file For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. 1040 e file You can treat two or more separate interests as one property or as separate properties. 1040 e file See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. 1040 e file There are two ways of figuring depletion on mineral property. 1040 e file Cost depletion. 1040 e file Percentage depletion. 1040 e file Generally, you must use the method that gives you the larger deduction. 1040 e file However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. 1040 e file See Oil and Gas Wells , later. 1040 e file Cost Depletion To figure cost depletion you must first determine the following. 1040 e file The property's basis for depletion. 1040 e file The total recoverable units of mineral in the property's natural deposit. 1040 e file The number of units of mineral sold during the tax year. 1040 e file Basis for depletion. 1040 e file   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. 1040 e file Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. 1040 e file The residual value of land and improvements at the end of operations. 1040 e file The cost or value of land acquired for purposes other than mineral production. 1040 e file Adjusted basis. 1040 e file   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. 1040 e file Your adjusted basis can never be less than zero. 1040 e file See Publication 551, Basis of Assets, for more information on adjusted basis. 1040 e file Total recoverable units. 1040 e file   The total recoverable units is the sum of the following. 1040 e file The number of units of mineral remaining at the end of the year (including units recovered but not sold). 1040 e file The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). 1040 e file   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. 1040 e file You must include ores and minerals that are developed, in sight, blocked out, or assured. 1040 e file You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. 1040 e file But see Elective safe harbor for owners of oil and gas property , later. 1040 e file Number of units sold. 1040 e file   You determine the number of units sold during the tax year based on your method of accounting. 1040 e file Use the following table to make this determination. 1040 e file    IF you  use . 1040 e file . 1040 e file . 1040 e file THEN the units sold during the year are . 1040 e file . 1040 e file . 1040 e file The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). 1040 e file An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. 1040 e file   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. 1040 e file Figuring the cost depletion deduction. 1040 e file   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. 1040 e file Step Action Result 1 Divide your property's basis for depletion by total recoverable units. 1040 e file Rate per unit. 1040 e file 2 Multiply the rate per unit by units sold during the tax year. 1040 e file Cost depletion deduction. 1040 e file You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. 1040 e file Elective safe harbor for owners of oil and gas property. 1040 e file   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. 1040 e file If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). 1040 e file For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. 1040 e file irs. 1040 e file gov/pub/irs-irbs/irb04-10. 1040 e file pdf. 1040 e file   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. 1040 e file The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. 1040 e file The election, if made, is effective for the tax year in which it is made and all later years. 1040 e file It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. 1040 e file Once revoked, it cannot be re-elected for the next 5 years. 1040 e file Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. 1040 e file The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . 1040 e file Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . 1040 e file Gross income. 1040 e file   When figuring percentage depletion, subtract from your gross income from the property the following amounts. 1040 e file Any rents or royalties you paid or incurred for the property. 1040 e file The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. 1040 e file A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. 1040 e file   Use the following fraction to figure the part of the bonus you must subtract. 1040 e file No. 1040 e file of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. 1040 e file For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. 1040 e file Taxable income limit. 1040 e file   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. 1040 e file   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. 1040 e file These deductible items include, but are not limited to, the following. 1040 e file Operating expenses. 1040 e file Certain selling expenses. 1040 e file Administrative and financial overhead. 1040 e file Depreciation. 1040 e file Intangible drilling and development costs. 1040 e file Exploration and development expenditures. 1040 e file Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. 1040 e file Losses sustained. 1040 e file   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. 1040 e file Do not deduct any net operating loss deduction from the gross income from the property. 1040 e file Corporations do not deduct charitable contributions from the gross income from the property. 1040 e file If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. 1040 e file See section 1. 1040 e file 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. 1040 e file Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. 1040 e file You are either an independent producer or a royalty owner. 1040 e file The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. 1040 e file If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. 1040 e file For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. 1040 e file Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. 1040 e file However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. 1040 e file For information on figuring the deduction, see Figuring percentage depletion , later. 1040 e file Refiners who cannot claim percentage depletion. 1040 e file   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. 1040 e file The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. 1040 e file Related person. 1040 e file   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. 1040 e file For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. 1040 e file A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. 1040 e file For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. 1040 e file The value of the outstanding stock of a corporation. 1040 e file The interest in the profits or capital of a partnership. 1040 e file The beneficial interests in an estate or trust. 1040 e file Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. 1040 e file Retailers who cannot claim percentage depletion. 1040 e file   You cannot claim percentage depletion if both the following apply. 1040 e file You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. 1040 e file Through a retail outlet operated by you or a related person. 1040 e file To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. 1040 e file To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. 1040 e file The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. 1040 e file   For the purpose of determining if this rule applies, do not count the following. 1040 e file Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. 1040 e file Bulk sales of aviation fuels to the Department of Defense. 1040 e file Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. 1040 e file Related person. 1040 e file   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. 1040 e file Sales through a related person. 1040 e file   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. 1040 e file   You are not considered to be selling through a related person who is a retailer if all the following apply. 1040 e file You do not have a significant ownership interest in the retailer. 1040 e file You sell your production to persons who are not related to either you or the retailer. 1040 e file The retailer does not buy oil or natural gas from your customers or persons related to your customers. 1040 e file There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. 1040 e file Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. 1040 e file Transferees who cannot claim percentage depletion. 1040 e file   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. 1040 e file For a definition of the term “transfer,” see section 1. 1040 e file 613A-7(n) of the regulations. 1040 e file For a definition of the term “interest in proven oil or gas property,” see section 1. 1040 e file 613A-7(p) of the regulations. 1040 e file Figuring percentage depletion. 1040 e file   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. 1040 e file If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. 1040 e file If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. 1040 e file   In addition, there is a limit on the percentage depletion deduction. 1040 e file See Taxable income limit , later. 1040 e file Average daily production. 1040 e file   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. 1040 e file Partial interest. 1040 e file   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. 1040 e file   You have a partial interest in the production from a property if you have a net profits interest in the property. 1040 e file To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. 1040 e file To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. 1040 e file Then multiply the total production from the property by your percentage participation to figure your share of the production. 1040 e file Example. 1040 e file Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. 1040 e file During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. 1040 e file Javier had expenses of $90,000 attributable to the property. 1040 e file The property generated a net profit of $110,000 ($200,000 − $90,000). 1040 e file Pablo received income of $22,000 ($110,000 × . 1040 e file 20) for his net profits interest. 1040 e file Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). 1040 e file Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). 1040 e file Depletable oil or natural gas quantity. 1040 e file   Generally, your depletable oil quantity is 1,000 barrels. 1040 e file Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. 1040 e file If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. 1040 e file Example. 1040 e file You have both oil and natural gas production. 1040 e file To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. 1040 e file Your depletable natural gas quantity is 2. 1040 e file 16 million cubic feet of gas (360 × 6000). 1040 e file You must reduce your depletable oil quantity to 640 barrels (1000 − 360). 1040 e file If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. 1040 e file Also, see Notice 2012-50, available at www. 1040 e file irs. 1040 e file gov/irb/2012–31_IRB/index. 1040 e file html. 1040 e file Business entities and family members. 1040 e file   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. 1040 e file Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). 1040 e file You and your spouse and minor children. 1040 e file A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. 1040 e file Controlled group of corporations. 1040 e file   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. 1040 e file They share the depletable quantity. 1040 e file A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. 1040 e file ” Gross income from the property. 1040 e file   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. 1040 e file If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. 1040 e file   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. 1040 e file   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. 1040 e file Average daily production exceeds depletable quantities. 1040 e file   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. 1040 e file Figure your average daily production of oil or natural gas for the year. 1040 e file Figure your depletable oil or natural gas quantity for the year. 1040 e file Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. 1040 e file Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). 1040 e file This is your depletion allowance for that property for the year. 1040 e file Taxable income limit. 1040 e file   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. 1040 e file 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. 1040 e file For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. 1040 e file 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. 1040 e file You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. 1040 e file Add it to your depletion allowance (before applying any limits) for the following year. 1040 e file Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. 1040 e file (However, see Electing large partnerships must figure depletion allowance , later. 1040 e file ) Each partner or shareholder must decide whether to use cost or percentage depletion. 1040 e file If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. 1040 e file Partner's or shareholder's adjusted basis. 1040 e file   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. 1040 e file The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. 1040 e file   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. 1040 e file However, in some cases, it is figured according to the partner's interest in partnership income. 1040 e file   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. 1040 e file Recordkeeping. 1040 e file Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. 1040 e file The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. 1040 e file The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. 1040 e file Reporting the deduction. 1040 e file   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). 1040 e file Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). 1040 e file The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. 1040 e file The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. 1040 e file Form 6198, At-Risk Limitations. 1040 e file Form 8582, Passive Activity Loss Limitations. 1040 e file Electing large partnerships must figure depletion allowance. 1040 e file   An electing large partnership, rather than each partner, generally must figure the depletion allowance. 1040 e file The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. 1040 e file Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. 1040 e file   An electing large partnership is one that meets both the following requirements. 1040 e file The partnership had 100 or more partners in the preceding year. 1040 e file The partnership chooses to be an electing large partnership. 1040 e file Disqualified persons. 1040 e file   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. 1040 e file Disqualified persons must figure it themselves, as explained earlier. 1040 e file   All the following are disqualified persons. 1040 e file Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). 1040 e file Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). 1040 e file Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. 1040 e file Average daily production is discussed earlier. 1040 e file Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. 1040 e file Natural gas sold under a fixed contract. 1040 e file   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. 1040 e file This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. 1040 e file The contract must have been in effect from February 1, 1975, until the date of sale of the gas. 1040 e file Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. 1040 e file Natural gas from geopressured brine. 1040 e file   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. 1040 e file This is natural gas that is both the following. 1040 e file Produced from a well you began to drill after September 1978 and before 1984. 1040 e file Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. 1040 e file Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. 1040 e file Mines and other natural deposits. 1040 e file   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. 1040 e file   The following is a list of the percentage depletion rates for the more common minerals. 1040 e file DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. 1040 e file Corporate deduction for iron ore and coal. 1040 e file   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). 1040 e file Gross income from the property. 1040 e file   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. 1040 e file Mining includes all the following. 1040 e file Extracting ores or minerals from the ground. 1040 e file Applying certain treatment processes described later. 1040 e file Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. 1040 e file Excise tax. 1040 e file   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. 1040 e file Extraction. 1040 e file   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. 1040 e file This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. 1040 e file Treatment processes. 1040 e file   The processes included as mining depend on the ore or mineral mined. 1040 e file To qualify as mining, the treatment processes must be applied by the mine owner or operator. 1040 e file For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. 1040 e file Transportation of more than 50 miles. 1040 e file   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. 1040 e file    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. 1040 e file Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. 1040 e file For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. 1040 e file irs. 1040 e file gov/irb/2013-01_IRB/ar11. 1040 e file html. 1040 e file Disposal of coal or iron ore. 1040 e file   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. 1040 e file You disposed of it after holding it for more than 1 year. 1040 e file You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. 1040 e file Treat any gain on the disposition as a capital gain. 1040 e file Disposal to related person. 1040 e file   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. 1040 e file A related person (as listed in chapter 2 of Publication 544). 1040 e file A person owned or controlled by the same interests that own or control you. 1040 e file Geothermal deposits. 1040 e file   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. 1040 e file A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. 1040 e file For percentage depletion purposes, a geothermal deposit is not considered a gas well. 1040 e file   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. 1040 e file See Gross income from the property , earlier, under Oil and Gas Wells. 1040 e file Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. 1040 e file Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. 1040 e file A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. 1040 e file Bonuses and advanced royalties. 1040 e file   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. 1040 e file If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. 1040 e file Figuring cost depletion. 1040 e file   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. 1040 e file To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. 1040 e file Figuring percentage depletion. 1040 e file   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . 1040 e file Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. 1040 e file However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. 1040 e file Ending the lease. 1040 e file   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. 1040 e file Do this for the year the lease ends or is abandoned. 1040 e file Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. 1040 e file   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. 1040 e file Include this amount in income for the year the lease ends. 1040 e file Increase your adjusted basis in the property by the amount you include in income. 1040 e file Delay rentals. 1040 e file   These are payments for deferring development of the property. 1040 e file Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. 1040 e file These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. 1040 e file Timber You can figure timber depletion only by the cost method. 1040 e file Percentage depletion does not apply to timber. 1040 e file Base your depletion on your cost or other basis in the timber. 1040 e file Your cost does not include the cost of land or any amounts recoverable through depreciation. 1040 e file Depletion takes place when you cut standing timber. 1040 e file You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. 1040 e file Figuring cost depletion. 1040 e file   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. 1040 e file Timber units. 1040 e file   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. 1040 e file You measure the timber using board feet, log scale, cords, or other units. 1040 e file If you later determine that you have more or less units of timber, you must adjust the original estimate. 1040 e file   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. 1040 e file Depletion unit. 1040 e file   You figure your depletion unit each year by taking the following steps. 1040 e file Determine your cost or adjusted basis of the timber on hand at the beginning of the year. 1040 e file Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. 1040 e file Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. 1040 e file Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. 1040 e file Divide the result of (2) by the result of (3). 1040 e file This is your depletion unit. 1040 e file Example. 1040 e file You bought a timber tract for $160,000 and the land was worth as much as the timber. 1040 e file Your basis for the timber is $80,000. 1040 e file Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). 1040 e file If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). 1040 e file When to claim depletion. 1040 e file   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). 1040 e file Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. 1040 e file The inventory is your basis for determining gain or loss in the tax year you sell the timber products. 1040 e file Example. 1040 e file The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. 1040 e file You would deduct $20,000 of the $40,000 depletion that year. 1040 e file You would add the remaining $20,000 depletion to your closing inventory of timber products. 1040 e file Electing to treat the cutting of timber as a sale or exchange. 1040 e file   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. 1040 e file You must make the election on your income tax return for the tax year to which it applies. 1040 e file If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. 1040 e file You generally report the gain as long-term capital gain. 1040 e file The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. 1040 e file For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. 1040 e file   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. 1040 e file The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040 e file See Form T (Timber), Forest Activities Schedule, for more information. 1040 e file Form T. 1040 e file   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. 1040 e file Prev  Up  Next   Home   More Online Publications