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File 1040ez online free Publication 15-T - Additional Material Table of Contents This image is too large to be displayed in the current screen. File 1040ez online free Please click the link to view the image. File 1040ez online free Form W-4 (2009) This image is too large to be displayed in the current screen. File 1040ez online free Please click the link to view the image. File 1040ez online free Deductions and Adjustments Worksheet Notice to Employees Please click here for the text description of the image. File 1040ez online free Multi-Media/Back Page Prev  Up  Next   Home   More Online Publications
 
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File 1040ez online free 9. File 1040ez online free   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. File 1040ez online free Depletion unit. File 1040ez online free Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. File 1040ez online free The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. File 1040ez online free There are two ways of figuring depletion: cost depletion and percentage depletion. File 1040ez online free For mineral property, you generally must use the method that gives you the larger deduction. File 1040ez online free For standing timber, you must use cost depletion. File 1040ez online free 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. File 1040ez online free More than one person can have an economic interest in the same mineral deposit or timber. File 1040ez online free In the case of leased property, the depletion deduction is divided between the lessor and the lessee. File 1040ez online free You have an economic interest if both the following apply. File 1040ez online free You have acquired by investment any interest in mineral deposits or standing timber. File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. File 1040ez online free Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. File 1040ez online free Basis adjustment for depletion. File 1040ez online free   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. File 1040ez online free Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). File 1040ez online free For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. File 1040ez online free You can treat two or more separate interests as one property or as separate properties. File 1040ez online free See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. File 1040ez online free There are two ways of figuring depletion on mineral property. File 1040ez online free Cost depletion. File 1040ez online free Percentage depletion. File 1040ez online free Generally, you must use the method that gives you the larger deduction. File 1040ez online free However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. File 1040ez online free See Oil and Gas Wells , later. File 1040ez online free Cost Depletion To figure cost depletion you must first determine the following. File 1040ez online free The property's basis for depletion. File 1040ez online free The total recoverable units of mineral in the property's natural deposit. File 1040ez online free The number of units of mineral sold during the tax year. File 1040ez online free Basis for depletion. File 1040ez online free   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. File 1040ez online free Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. File 1040ez online free The residual value of land and improvements at the end of operations. File 1040ez online free The cost or value of land acquired for purposes other than mineral production. File 1040ez online free Adjusted basis. File 1040ez online free   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. File 1040ez online free Your adjusted basis can never be less than zero. File 1040ez online free See Publication 551, Basis of Assets, for more information on adjusted basis. File 1040ez online free Total recoverable units. File 1040ez online free   The total recoverable units is the sum of the following. File 1040ez online free The number of units of mineral remaining at the end of the year (including units recovered but not sold). File 1040ez online free The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). File 1040ez online free   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. File 1040ez online free You must include ores and minerals that are developed, in sight, blocked out, or assured. File 1040ez online free You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. File 1040ez online free But see Elective safe harbor for owners of oil and gas property , later. File 1040ez online free Number of units sold. File 1040ez online free   You determine the number of units sold during the tax year based on your method of accounting. File 1040ez online free Use the following table to make this determination. File 1040ez online free    IF you  use . File 1040ez online free . File 1040ez online free . File 1040ez online free THEN the units sold during the year are . File 1040ez online free . File 1040ez online free . File 1040ez online free The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). File 1040ez online free An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. File 1040ez online free   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. File 1040ez online free Figuring the cost depletion deduction. File 1040ez online free   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. File 1040ez online free Step Action Result 1 Divide your property's basis for depletion by total recoverable units. File 1040ez online free Rate per unit. File 1040ez online free 2 Multiply the rate per unit by units sold during the tax year. File 1040ez online free Cost depletion deduction. File 1040ez online free You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. File 1040ez online free Elective safe harbor for owners of oil and gas property. File 1040ez online free   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. File 1040ez online free If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). File 1040ez online free For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. File 1040ez online free irs. File 1040ez online free gov/pub/irs-irbs/irb04-10. File 1040ez online free pdf. File 1040ez online free   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. File 1040ez online free The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. File 1040ez online free The election, if made, is effective for the tax year in which it is made and all later years. File 1040ez online free It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. File 1040ez online free Once revoked, it cannot be re-elected for the next 5 years. File 1040ez online free 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. File 1040ez online free 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 . File 1040ez online free Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . File 1040ez online free Gross income. File 1040ez online free   When figuring percentage depletion, subtract from your gross income from the property the following amounts. File 1040ez online free Any rents or royalties you paid or incurred for the property. File 1040ez online free 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. File 1040ez online free A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. File 1040ez online free   Use the following fraction to figure the part of the bonus you must subtract. File 1040ez online free No. File 1040ez online free 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. File 1040ez online free For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. File 1040ez online free Taxable income limit. File 1040ez online free   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. File 1040ez online free   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. File 1040ez online free These deductible items include, but are not limited to, the following. File 1040ez online free Operating expenses. File 1040ez online free Certain selling expenses. File 1040ez online free Administrative and financial overhead. File 1040ez online free Depreciation. File 1040ez online free Intangible drilling and development costs. File 1040ez online free Exploration and development expenditures. File 1040ez online free Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. File 1040ez online free Losses sustained. File 1040ez online free   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. File 1040ez online free Do not deduct any net operating loss deduction from the gross income from the property. File 1040ez online free Corporations do not deduct charitable contributions from the gross income from the property. File 1040ez online free 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. File 1040ez online free See section 1. File 1040ez online free 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. File 1040ez online free Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. File 1040ez online free You are either an independent producer or a royalty owner. File 1040ez online free The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. File 1040ez online free If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. File 1040ez online free For information on figuring the deduction, see Figuring percentage depletion , later. File 1040ez online free Refiners who cannot claim percentage depletion. File 1040ez online free   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. File 1040ez online free 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. File 1040ez online free Related person. File 1040ez online free   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. File 1040ez online free For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. File 1040ez online free A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. File 1040ez online free 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. File 1040ez online free The value of the outstanding stock of a corporation. File 1040ez online free The interest in the profits or capital of a partnership. File 1040ez online free The beneficial interests in an estate or trust. File 1040ez online free 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. File 1040ez online free Retailers who cannot claim percentage depletion. File 1040ez online free   You cannot claim percentage depletion if both the following apply. File 1040ez online free You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. File 1040ez online free Through a retail outlet operated by you or a related person. File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free   For the purpose of determining if this rule applies, do not count the following. File 1040ez online free Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. File 1040ez online free Bulk sales of aviation fuels to the Department of Defense. File 1040ez online free 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. File 1040ez online free Related person. File 1040ez online free   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. File 1040ez online free Sales through a related person. File 1040ez online free   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. File 1040ez online free   You are not considered to be selling through a related person who is a retailer if all the following apply. File 1040ez online free You do not have a significant ownership interest in the retailer. File 1040ez online free You sell your production to persons who are not related to either you or the retailer. File 1040ez online free The retailer does not buy oil or natural gas from your customers or persons related to your customers. File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free Transferees who cannot claim percentage depletion. File 1040ez online free   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. File 1040ez online free For a definition of the term “transfer,” see section 1. File 1040ez online free 613A-7(n) of the regulations. File 1040ez online free For a definition of the term “interest in proven oil or gas property,” see section 1. File 1040ez online free 613A-7(p) of the regulations. File 1040ez online free Figuring percentage depletion. File 1040ez online free   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. File 1040ez online free 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%. File 1040ez online free 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. File 1040ez online free   In addition, there is a limit on the percentage depletion deduction. File 1040ez online free See Taxable income limit , later. File 1040ez online free Average daily production. File 1040ez online free   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. File 1040ez online free Partial interest. File 1040ez online free   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. File 1040ez online free   You have a partial interest in the production from a property if you have a net profits interest in the property. File 1040ez online free 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. File 1040ez online free To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. File 1040ez online free Then multiply the total production from the property by your percentage participation to figure your share of the production. File 1040ez online free Example. File 1040ez online free Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. File 1040ez online free During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. File 1040ez online free Javier had expenses of $90,000 attributable to the property. File 1040ez online free The property generated a net profit of $110,000 ($200,000 − $90,000). File 1040ez online free Pablo received income of $22,000 ($110,000 × . File 1040ez online free 20) for his net profits interest. File 1040ez online free 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). File 1040ez online free Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). File 1040ez online free Depletable oil or natural gas quantity. File 1040ez online free   Generally, your depletable oil quantity is 1,000 barrels. File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free Example. File 1040ez online free You have both oil and natural gas production. File 1040ez online free To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. File 1040ez online free Your depletable natural gas quantity is 2. File 1040ez online free 16 million cubic feet of gas (360 × 6000). File 1040ez online free You must reduce your depletable oil quantity to 640 barrels (1000 − 360). File 1040ez online free 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. File 1040ez online free Also, see Notice 2012-50, available at www. File 1040ez online free irs. File 1040ez online free gov/irb/2012–31_IRB/index. File 1040ez online free html. File 1040ez online free Business entities and family members. File 1040ez online free   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. File 1040ez online free 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). File 1040ez online free You and your spouse and minor children. File 1040ez online free 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. File 1040ez online free Controlled group of corporations. File 1040ez online free   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. File 1040ez online free They share the depletable quantity. File 1040ez online free 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%. File 1040ez online free ” Gross income from the property. File 1040ez online free   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. File 1040ez online free 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. File 1040ez online free   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. File 1040ez online free   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. File 1040ez online free Average daily production exceeds depletable quantities. File 1040ez online free   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. File 1040ez online free Figure your average daily production of oil or natural gas for the year. File 1040ez online free Figure your depletable oil or natural gas quantity for the year. File 1040ez online free Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. File 1040ez online free 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). File 1040ez online free This is your depletion allowance for that property for the year. File 1040ez online free Taxable income limit. File 1040ez online free   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. File 1040ez online free 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. File 1040ez online free For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. File 1040ez online free 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. File 1040ez online free You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. File 1040ez online free Add it to your depletion allowance (before applying any limits) for the following year. File 1040ez online free Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. File 1040ez online free (However, see Electing large partnerships must figure depletion allowance , later. File 1040ez online free ) Each partner or shareholder must decide whether to use cost or percentage depletion. File 1040ez online free 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. File 1040ez online free Partner's or shareholder's adjusted basis. File 1040ez online free   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. File 1040ez online free The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. File 1040ez online free   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. File 1040ez online free However, in some cases, it is figured according to the partner's interest in partnership income. File 1040ez online free   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. File 1040ez online free Recordkeeping. File 1040ez online free 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. File 1040ez online free The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. File 1040ez online free 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. File 1040ez online free Reporting the deduction. File 1040ez online free   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). File 1040ez online free Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). File 1040ez online free The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. File 1040ez online free The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. File 1040ez online free Form 6198, At-Risk Limitations. File 1040ez online free Form 8582, Passive Activity Loss Limitations. File 1040ez online free Electing large partnerships must figure depletion allowance. File 1040ez online free   An electing large partnership, rather than each partner, generally must figure the depletion allowance. File 1040ez online free 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. File 1040ez online free Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. File 1040ez online free   An electing large partnership is one that meets both the following requirements. File 1040ez online free The partnership had 100 or more partners in the preceding year. File 1040ez online free The partnership chooses to be an electing large partnership. File 1040ez online free Disqualified persons. File 1040ez online free   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. File 1040ez online free Disqualified persons must figure it themselves, as explained earlier. File 1040ez online free   All the following are disqualified persons. File 1040ez online free Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). File 1040ez online free Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). File 1040ez online free 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. File 1040ez online free Average daily production is discussed earlier. File 1040ez online free 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. File 1040ez online free Natural gas sold under a fixed contract. File 1040ez online free   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. File 1040ez online free 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. File 1040ez online free The contract must have been in effect from February 1, 1975, until the date of sale of the gas. File 1040ez online free 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. File 1040ez online free Natural gas from geopressured brine. File 1040ez online free   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. File 1040ez online free This is natural gas that is both the following. File 1040ez online free Produced from a well you began to drill after September 1978 and before 1984. File 1040ez online free Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. File 1040ez online free Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. File 1040ez online free Mines and other natural deposits. File 1040ez online free   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. File 1040ez online free   The following is a list of the percentage depletion rates for the more common minerals. File 1040ez online free 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. File 1040ez online free Corporate deduction for iron ore and coal. File 1040ez online free   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). File 1040ez online free Gross income from the property. File 1040ez online free   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. File 1040ez online free Mining includes all the following. File 1040ez online free Extracting ores or minerals from the ground. File 1040ez online free Applying certain treatment processes described later. File 1040ez online free 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. File 1040ez online free Excise tax. File 1040ez online free   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. File 1040ez online free Extraction. File 1040ez online free   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. File 1040ez online free 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. File 1040ez online free Treatment processes. File 1040ez online free   The processes included as mining depend on the ore or mineral mined. File 1040ez online free To qualify as mining, the treatment processes must be applied by the mine owner or operator. File 1040ez online free For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. File 1040ez online free Transportation of more than 50 miles. File 1040ez online free   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. File 1040ez online free    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. File 1040ez online free 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. File 1040ez online free For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. File 1040ez online free irs. File 1040ez online free gov/irb/2013-01_IRB/ar11. File 1040ez online free html. File 1040ez online free Disposal of coal or iron ore. File 1040ez online free   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. File 1040ez online free You disposed of it after holding it for more than 1 year. File 1040ez online free You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. File 1040ez online free Treat any gain on the disposition as a capital gain. File 1040ez online free Disposal to related person. File 1040ez online free   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. File 1040ez online free A related person (as listed in chapter 2 of Publication 544). File 1040ez online free A person owned or controlled by the same interests that own or control you. File 1040ez online free Geothermal deposits. File 1040ez online free   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. File 1040ez online free A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. File 1040ez online free For percentage depletion purposes, a geothermal deposit is not considered a gas well. File 1040ez online free   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. File 1040ez online free See Gross income from the property , earlier, under Oil and Gas Wells. File 1040ez online free Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. File 1040ez online free Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. File 1040ez online free A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. File 1040ez online free Bonuses and advanced royalties. File 1040ez online free   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. File 1040ez online free 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. File 1040ez online free Figuring cost depletion. File 1040ez online free   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. File 1040ez online free 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. File 1040ez online free Figuring percentage depletion. File 1040ez online free   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 . File 1040ez online free 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. File 1040ez online free 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. File 1040ez online free Ending the lease. File 1040ez online free   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. File 1040ez online free Do this for the year the lease ends or is abandoned. File 1040ez online free Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. File 1040ez online free   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. File 1040ez online free Include this amount in income for the year the lease ends. File 1040ez online free Increase your adjusted basis in the property by the amount you include in income. File 1040ez online free Delay rentals. File 1040ez online free   These are payments for deferring development of the property. File 1040ez online free Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. File 1040ez online free These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. File 1040ez online free Timber You can figure timber depletion only by the cost method. File 1040ez online free Percentage depletion does not apply to timber. File 1040ez online free Base your depletion on your cost or other basis in the timber. File 1040ez online free Your cost does not include the cost of land or any amounts recoverable through depreciation. File 1040ez online free Depletion takes place when you cut standing timber. File 1040ez online free You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. File 1040ez online free Figuring cost depletion. File 1040ez online free   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. File 1040ez online free Timber units. File 1040ez online free   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. File 1040ez online free You measure the timber using board feet, log scale, cords, or other units. File 1040ez online free If you later determine that you have more or less units of timber, you must adjust the original estimate. File 1040ez online free   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. File 1040ez online free Depletion unit. File 1040ez online free   You figure your depletion unit each year by taking the following steps. File 1040ez online free Determine your cost or adjusted basis of the timber on hand at the beginning of the year. File 1040ez online free Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. File 1040ez online free Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. File 1040ez online free 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. File 1040ez online free Divide the result of (2) by the result of (3). File 1040ez online free This is your depletion unit. File 1040ez online free Example. File 1040ez online free You bought a timber tract for $160,000 and the land was worth as much as the timber. File 1040ez online free Your basis for the timber is $80,000. File 1040ez online free 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). File 1040ez online free If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). File 1040ez online free When to claim depletion. File 1040ez online free   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). File 1040ez online free 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. File 1040ez online free The inventory is your basis for determining gain or loss in the tax year you sell the timber products. File 1040ez online free Example. File 1040ez online free The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. File 1040ez online free You would deduct $20,000 of the $40,000 depletion that year. File 1040ez online free You would add the remaining $20,000 depletion to your closing inventory of timber products. File 1040ez online free Electing to treat the cutting of timber as a sale or exchange. File 1040ez online free   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. File 1040ez online free You must make the election on your income tax return for the tax year to which it applies. File 1040ez online free 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. File 1040ez online free You generally report the gain as long-term capital gain. File 1040ez online free 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. File 1040ez online free For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. File 1040ez online free   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. File 1040ez online free The prior election (and revocation) is disregarded for purposes of making a subsequent election. File 1040ez online free See Form T (Timber), Forest Activities Schedule, for more information. File 1040ez online free Form T. File 1040ez online free   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. File 1040ez online free Prev  Up  Next   Home   More Online Publications