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Free Federal Tax Filing 2012

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Free Federal Tax Filing 2012

Free federal tax filing 2012 Index A Activities not for profit, Hobby Expenses Adjustments to gross income Armed forces reservists' travel expenses, Armed Forces reservists traveling more than 100 miles from home. Free federal tax filing 2012 Performing artists, Performing Artists State or local government officials paid on fee basis, Officials Paid on a Fee Basis Unlawful discrimination claims, Unlawful discrimination claims. Free federal tax filing 2012 Administrative fees IRA trustees, Trustee's Administrative Fees for IRA Adoption expenses, Adoption Expenses Amortizable bond premium, Amortizable Premium on Taxable Bonds, More information. Free federal tax filing 2012 Appraisal fees, Appraisal Fees Armed forces Military uniforms, Military uniforms. Free federal tax filing 2012 Reservists, travel expenses, Armed Forces reservists traveling more than 100 miles from home. Free federal tax filing 2012 Assistance (see Tax help) B Bad debts, Business Bad Debt Bank accounts Check-writing fees, Check-Writing Fees on Personal Account Losses on deposits, Loss on Deposits Bonds Amortizable premium, Amortizable Premium on Taxable Bonds Breach of contract Damages, Damages for Breach of Employment Contract Bribes, List of Nondeductible Expenses Burial expenses, List of Nondeductible Expenses Business expenses (see Employee business expenses) Business gifts, Gift expenses. Free federal tax filing 2012 C Campaign contributions, Lobbying and political activities. Free federal tax filing 2012 , Political Contributions Campaign expenses, Campaign Expenses Capital expenditures, Capital Expenses Casualty losses, Casualty and Theft Losses, Casualty and Theft Losses of Income-Producing Property Cell phones, Depreciation on Computers Chambers of Commerce dues, Lobbying and political activities. Free federal tax filing 2012 Check-writing fees, Check-Writing Fees on Personal Account Claim of right repayments, Repayments Under Claim of Right Clerical help, deductibility of, Clerical Help and Office Rent Clothes Protective, Protective clothing. Free federal tax filing 2012 Work, Work Clothes and Uniforms Club dues, Club Dues Commissions, Commissions Commuting expenses, Commuting Expenses Computers Depreciation, Depreciation on Computers, Depreciation on Home Computer, Excess Deductions of an Estate Convenience fees, Credit or Debit Card Convenience Fees Criminal prosecutions Travel expenses for federal staff, Federal crime investigation and prosecution. Free federal tax filing 2012 D Damages Breach of employment contract, Damages for Breach of Employment Contract Deposits Losses on, Loss on Deposits Depreciation Computers, Depreciation on Computers, Depreciation on Home Computer, Excess Deductions of an Estate Disabilities, persons with Work-related expenses, Impairment-Related Work Expenses Dividends Fees to collect, Fees To Collect Interest and Dividends Service charges on reinvestment plans, Service Charges on Dividend Reinvestment Plans Dues, Dues to Chambers of Commerce and Professional Societies (see also Expenses) (see also Fees) Chambers of Commerce, Dues to Chambers of Commerce and Professional Societies Club, Club Dues Lobbying, Dues used for lobbying. Free federal tax filing 2012 Professional societies, Dues to Chambers of Commerce and Professional Societies Union, Union Dues and Expenses E Education, Educator Expenses, Education Expenses During Unemployment Education expenses, Work-Related Education, More information. Free federal tax filing 2012 Employee business expenses Form 2106 and Form 2106-EZ, Form 2106 and Form 2106-EZ. Free federal tax filing 2012 Performing artists, Performing Artists Unreimbursed, Unreimbursed Employee Expenses Employment Agency fees, Employment and outplacement agency fees. Free federal tax filing 2012 Breach of contract, Damages for Breach of Employment Contract Entertainers and musicians (see Performing artists) Entertainment expenses, Meals and entertainment. Free federal tax filing 2012 Estates Federal estate tax, Federal Estate Tax on Income in Respect of a Decedent Expenses, Dues to Chambers of Commerce and Professional Societies, Education Expenses During Unemployment (see also Dues) (see also Fees) Adoption, Adoption Expenses Campaign, Campaign Expenses Capital, Capital Expenses Commuting, Commuting Expenses Education Work-related, Work-Related Education Educator, Educator Expenses Qualified, Qualified expenses. Free federal tax filing 2012 Educator Expenses, Eligible educator. Free federal tax filing 2012 Employee business (see Employee business expenses) Entertainment, Meals and entertainment. Free federal tax filing 2012 Funeral and burial, List of Nondeductible Expenses Gifts, Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging, Gift expenses. Free federal tax filing 2012 Health spa, Health Spa Expenses Hobby, Hobby Expenses Home office, Home Office Impairment-related, Impairment-Related Work Expenses Investment, Investment Fees and Expenses, Investment-Related Seminars Job search, Job Search Expenses Legal (see Legal expenses) Local lodging, Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging Meals, Meals and entertainment. Free federal tax filing 2012 , Lunches With Co-workers Meals and entertainment, Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging Nondeductible, Nondeductible Expenses Over limit, educator, Educator expenses over limit. Free federal tax filing 2012 Personal, Nondeductible Expenses Production of income, Other Expenses Professional promotion, Professional Reputation Tax-exempt income, Tax-Exempt Income Expenses Travel and transportation, Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging Travel as education, Travel as education. Free federal tax filing 2012 F Federal estate tax, Federal Estate Tax on Income in Respect of a Decedent Fees, Dues to Chambers of Commerce and Professional Societies (see also Dues) (see also Expenses) Appraisal, Appraisal Fees Check-writing, Check-Writing Fees on Personal Account Employment and outplacement agency, Employment and outplacement agency fees. Free federal tax filing 2012 Investment, Fees To Collect Interest and Dividends, Investment Fees and Expenses IRA trustee, Trustee's Administrative Fees for IRA Legal (see Legal expenses) License, Licenses and Regulatory Fees Professional accreditation, Professional Accreditation Fees Fines, Fines or Penalties Form 2106 Employee business expenses, Form 2106 and Form 2106-EZ. Free federal tax filing 2012 Form 2106-EZ Employee business expenses, Form 2106 and Form 2106-EZ. Free federal tax filing 2012 Form 4562 Depreciation and amortization, Reporting your depreciation deduction. Free federal tax filing 2012 , Depreciation. Free federal tax filing 2012 , Computer used in a home office. Free federal tax filing 2012 Free tax services, Free help with your tax return. Free federal tax filing 2012 Funeral expenses, List of Nondeductible Expenses G Gambling winnings and losses, Gambling Losses Up to the Amount of Gambling Winnings Government employees Federal criminal investigation and prosecution travel expenses, Federal crime investigation and prosecution. Free federal tax filing 2012 State or local government officials paid on fee basis, Officials Paid on a Fee Basis H Health spa, Health Spa Expenses Help (see Tax help) Hobbies, Hobby Expenses Home Security system, Home Security System Telephone service, Residential Telephone Service Home office Computers, Computer used in a home office. Free federal tax filing 2012 Expenses, Home Office Principal place of business, Principal place of business. Free federal tax filing 2012 Travel and transportation expenses, Home office. Free federal tax filing 2012 I Impairment-related work expenses, Impairment-Related Work Expenses Income aid payment, Repayment of Income Aid Payment Income in respect of decedent Estate tax, Federal Estate Tax on Income in Respect of a Decedent Individual retirement arrangements (IRAs) Trustees' fees, Trustee's Administrative Fees for IRA Insurance Business liability, Business Liability Insurance Life insurance, Life Insurance Premiums Malpractice, Unreimbursed Employee Expenses Personal disability, List of Nondeductible Expenses Interest income Fees to collect, Fees To Collect Interest and Dividends Investments Annuity, unrecovered investment in, Unrecovered Investment in Annuity Deposits, losses on, Loss on Deposits Fees and expenses, Investment Fees and Expenses Seminars, Investment-Related Seminars Itemized deductions Deductions not subject to 2% limit, Deductions Not Subject to the 2% Limit Deductions subject to 2% limit, Introduction, Deductions Subject to the 2% Limit How to report, How To Report J Job search, Job Search Expenses, Travel and transportation expenses. Free federal tax filing 2012 K Kickbacks, List of Nondeductible Expenses L Legal expenses Job-related, Legal Fees Personal, Personal Legal Expenses Political campaigns, Legal fees. Free federal tax filing 2012 Production of income, Legal Expenses Unlawful discrimination claims, Legal Expenses Licenses Fees, Licenses and Regulatory Fees Life insurance, Life Insurance Premiums Lobbying, Lobbying and political activities. Free federal tax filing 2012 , Lobbying Expenses, Exceptions. Free federal tax filing 2012 Local transportation, Local transportation expenses. Free federal tax filing 2012 Losses Casualties and thefts, Casualty and Theft Losses, Casualty and Theft Losses of Income-Producing Property Deposits, Loss on Deposits Gambling, Gambling Losses Up to the Amount of Gambling Winnings IRA, Loss on IRA Mislaid cash or property, Lost or Mislaid Cash or Property Partnership, Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 Roth IRA, Loss on IRA M Mail carriers, rural, Rural Mail Carriers' Vehicle Expenses Malpractice insurance, Unreimbursed Employee Expenses Meal and lodging expenses, Meals and entertainment. Free federal tax filing 2012 Lunches with coworkers, Lunches With Co-workers Working late, Meals While Working Late Medical examinations, Unreimbursed Employee Expenses Mileage rate, What's New Missing children, photographs of, Reminders Mutual funds Indirect deductions, Indirect Deductions of Pass-Through Entities N Nondeductible expenses, Nondeductible Expenses, Wristwatches Not-for-profit activities, Hobby Expenses O Occupational taxes, Occupational Taxes Office Home (see Home office) Rent, Clerical Help and Office Rent Outplacement agency fees, Employment and outplacement agency fees. Free federal tax filing 2012 P Partnerships Indirect deductions, Indirect Deductions of Pass-Through Entities Pass-through entities, Indirect Deductions of Pass-Through Entities Passport expense, Unreimbursed Employee Expenses Penalties, Fines or Penalties Performing artists, Performing Artists Work clothes, Work Clothes and Uniforms Personal expenses, Nondeductible Expenses, Wristwatches Political contributions, Lobbying and political activities. Free federal tax filing 2012 , Political Contributions Campaign expenses, Campaign Expenses Ponzi-type investment schemes, Losses From Ponzi-type Investment Schemes Postal workers, Rural Mail Carriers' Vehicle Expenses Production of income expenses, Other Expenses, Loss on IRA Professional accreditation fees, Professional Accreditation Fees Professional journals, Unreimbursed Employee Expenses Professional reputation and marketing, Professional Reputation Professional societies dues, Lobbying and political activities. Free federal tax filing 2012 Prosecution travel expenses, Federal crime investigation and prosecution. Free federal tax filing 2012 Protective clothing, Protective clothing. Free federal tax filing 2012 Publications (see Tax help) R Recordkeeping requirements Computer used for home and business, Depreciation on Computers Deductions, to verify, Introduction Gambling winnings and losses, Gambling Losses Up to the Amount of Gambling Winnings Home office, Home Office Relief fund contributions, Relief Fund Contributions Rent Office, Clerical Help and Office Rent Safe deposit box, Safe Deposit Box Rent Repayments Claim of right, Repayments Under Claim of Right Income, Repayments of Income Income aid payments, Unreimbursed Employee Expenses Social Security benefits, Repayments of Social Security Benefits Reporting requirements Armed Forces reservists, Armed Forces reservists. Free federal tax filing 2012 Computer used in a home office, Computer used in a home office. Free federal tax filing 2012 Depreciation, Depreciation. Free federal tax filing 2012 Form 2106 and Form 2106-EZ, Form 2106 and Form 2106-EZ. Free federal tax filing 2012 Impairment-related work expenses, Impairment-related work expenses. Free federal tax filing 2012 Itemized deductions, How To Report Tax preparation fees, Tax preparation fees. Free federal tax filing 2012 Research expenses, Research Expenses of a College Professor Résumé, Résumé. Free federal tax filing 2012 Rural mail carriers, Rural Mail Carriers' Vehicle Expenses S S corporations Indirect deductions, Indirect Deductions of Pass-Through Entities Safe deposit box, Safe Deposit Box Rent Security systems, home, Home Security System Seminars, investment-related, Investment-Related Seminars Service charges on dividend reinvestment plans, Service Charges on Dividend Reinvestment Plans Social Security repayments, Repayments of Social Security Benefits State or local governments Officials paid on fee basis, Officials Paid on a Fee Basis Stockholders' meeting expenses, Stockholders' Meetings T Tax help, How To Get Tax Help Tax-exempt income expenses, Tax-Exempt Income Expenses Taxes Estate tax, Federal Estate Tax on Income in Respect of a Decedent Occupational, Occupational Taxes Telephones Cell phone, Depreciation on Computers Residential service, Residential Telephone Service Theft losses, Casualty and Theft Losses, Casualty and Theft Losses of Income-Producing Property Tools, Tools Used in Your Work Travel and transportation expenses, Local lodging. Free federal tax filing 2012 , Additional information. Free federal tax filing 2012 Another individual, paid by taxpayer, Travel Expenses for Another Individual Armed forces reservists, Armed Forces reservists traveling more than 100 miles from home. Free federal tax filing 2012 Commuting, Commuting Expenses Criminal investigations and prosecutions, Federal crime investigation and prosecution. Free federal tax filing 2012 Education, Travel as education. Free federal tax filing 2012 Indefinite work assignments, Indefinite work assignment. Free federal tax filing 2012 Job search, Travel and transportation expenses. Free federal tax filing 2012 Local transportation, Local transportation expenses. Free federal tax filing 2012 Research, Research Expenses of a College Professor Temporary work assignments, Temporary work assignment. Free federal tax filing 2012 Trustees IRA administrative fees, Trustee's Administrative Fees for IRA TTY/TDD information, How To Get Tax Help U Unemployment and education expenses, Education Expenses During Unemployment Unemployment benefit fund contributions, Voluntary Unemployment Benefit Fund Contributions Uniforms, military, Military uniforms. Free federal tax filing 2012 Union dues, Union Dues and Expenses Unreimbursed employee expenses, Unreimbursed Employee Expenses, Military uniforms. Free federal tax filing 2012 W Wagering winnings and losses, Gambling Losses Up to the Amount of Gambling Winnings Work Clothes and uniforms, Work Clothes and Uniforms Impairment-related expenses, Impairment-Related Work Expenses Supplies, Unreimbursed Employee Expenses Tools, Unreimbursed Employee Expenses, Tools Used in Your Work Travel and transportation expenses, Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging Wristwatches, List of Nondeductible Expenses, Wristwatches Prev  Up     Home   More Online Publications
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The Free Federal Tax Filing 2012

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