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

If it sounds too good to be true, it probably is!" Seek professional advice from the IRS or a Tax Professional before you subscribe to any scheme that offers exemption from your obligation as a United States Citizen to pay taxes. Buying into a tax evasion scheme can be very costly.

Department of Justice Press Releases on Civil and Criminal Actions Taken as a Result of IRS Enforcement Activities

The Department of Justice issues press releases on IRS enforcement activities.

Tax Scams: How to Recognize and Avoid Them

To help the public recognize and avoid abusive tax schemes, the IRS offers an abundance of educational materials. Participating in an illegal scheme to avoid paying taxes can result in imprisonment and fines, as well as the repayment of taxes owed with penalties and interest. Education is the best way to avoid the pitfalls of these “too good to be true” tax scams.

Tax Scams/Consumer Alerts

Don't fall victim to tax scams. The IRS issues News Releases on some of the common scams, including the annual Dirty Dozen news release.

Special Advice for Law Enforcement on Avoiding Tax Preparer Scams

           Enforcing the Laws and Paying Taxes: Is there a Connection?

This is one of many outreach articles the IRS prepares to help educate the public about tax scams.  

Examples of Fraud Investigations

In addition to the  Tax Fraud Alerts page, Criminal Investigation (CI) wants you to know about other areas of fraud in which individuals have been criminally prosecuted

How Do You Report Suspected Tax Fraud Activity?
If you have information about an individual or company you suspect is not complying with the tax law, report this activity.


Criminal Investigation (CI)

Tax Fraud Alerts

Page Last Reviewed or Updated: 09-Jan-2014

The Free Federal And State Tax Filing

Free federal and state tax filing 6. Free federal and state tax filing   Estimated Tax Table of Contents Who Must Make Estimated Tax Payments Estimated tax is a method used to pay tax on income that is not subject to withholding. Free federal and state tax filing This income includes self-employment income, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. Free federal and state tax filing Income tax generally is withheld from pensions and annuity payments you receive. Free federal and state tax filing However, if the tax withheld from your pension (or other) income is not enough, you may have to pay estimated tax. Free federal and state tax filing If you do not pay enough tax through withholding, by making estimated tax payments, or both, you may be charged a penalty. Free federal and state tax filing Who Must Make Estimated Tax Payments If you had a tax liability for 2013, you may have to pay estimated tax for 2014. Free federal and state tax filing In most cases, you must pay estimated tax for 2014 if both of the following apply. Free federal and state tax filing You expect to owe at least $1,000 in tax for 2014, after subtracting your withholding and refundable credits. Free federal and state tax filing You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax to be shown on your 2014 tax return, or 100% of the tax shown on your 2013 tax return. Free federal and state tax filing The 2013 tax return must cover all 12 months. Free federal and state tax filing If all of your income will be subject to income tax withholding, you probably do not need to make estimated tax payments. Free federal and state tax filing For more information on estimated tax, see Publication 505. Free federal and state tax filing Prev  Up  Next   Home   More Online Publications