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Free online income tax filing Publication 17 - Introductory Material Table of Contents What's New Reminders IntroductionIcons. Free online income tax filing Ordering forms and publications. Free online income tax filing Tax questions. Free online income tax filing All material in this publication may be reprinted freely. Free online income tax filing A citation to Your Federal Income Tax (2013) would be appropriate. Free online income tax filing The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of: Tax laws enacted by Congress, Treasury regulations, and Court decisions. Free online income tax filing However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Free online income tax filing This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Free online income tax filing Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS. Free online income tax filing All taxpayers have important rights when working with the IRS. Free online income tax filing These rights are described in Your Rights as a Taxpayer in the back of this publication. Free online income tax filing What's New This section summarizes important tax changes that took effect in 2013. Free online income tax filing Most of these changes are discussed in more detail throughout this publication. Free online income tax filing Future developments. Free online income tax filing  For the latest information about the tax law topics covered in this publication, including information about any tax legislation, go to www. Free online income tax filing irs. Free online income tax filing gov/pub17. Free online income tax filing Additional Medicare Tax. Free online income tax filing  Beginning in 2013, a 0. Free online income tax filing 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Free online income tax filing See Form 8959 and its instructions. Free online income tax filing Net Investment Income Tax. Free online income tax filing  Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Free online income tax filing The NIIT is 3. Free online income tax filing 8% of the smaller of (a) your net investment income or (b) the excess of your modified adjusted gross income over: $125,000 if married filing separately, $250,000 if married filing jointly or qualifying widow(er), or $200,000 if any other filing status. Free online income tax filing See Form 8960 and its instructions. Free online income tax filing Change in tax rates. Free online income tax filing  The highest tax rate is 39. Free online income tax filing 6%. Free online income tax filing For more information, see the 2013 Tax Computation Worksheet or the 2013 Tax Rate Schedules near the end of this publication. Free online income tax filing Tax rate on net capital gain and qualified dividends. Free online income tax filing  The maximum tax rate of 15% on net capital gain and qualified dividends has increased to 20% for some taxpayers. Free online income tax filing See chapter 16. Free online income tax filing Medical and dental expenses. Free online income tax filing  You can deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (7. Free online income tax filing 5% if either you or your spouse is age 65 or older). Free online income tax filing See chapter 21. Free online income tax filing Personal exemption amount increased for certain taxpayers. Free online income tax filing  Your personal exemption is increased to $3,900. Free online income tax filing But the amount is reduced if your adjusted gross income is more than: $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if any other filing status. Free online income tax filing See chapter 3. Free online income tax filing Limit on itemized deductions. Free online income tax filing  You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if any other filing status. Free online income tax filing See chapter 29. Free online income tax filing Same-sex marriages. Free online income tax filing  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. Free online income tax filing See chapter 2. Free online income tax filing If you meet certain requirements, you may be able to file amended returns to change your filing status for some earlier years. Free online income tax filing For details on filing amended returns, see chapter 1. Free online income tax filing Health flexible spending arrangements (FSAs). Free online income tax filing  You cannot have more than $2,500 in salary reduction contributions made to a health FSA for plan years beginning after 2012. Free online income tax filing See chapter 5. Free online income tax filing Expiring credits. Free online income tax filing  The plug-in electric vehicle credit and the refundable part of the credit for prior year minimum tax have expired. Free online income tax filing You cannot claim either one on your 2013 return. Free online income tax filing See chapter 37. Free online income tax filing Ponzi-type investment schemes. Free online income tax filing  There are new rules for how to claim a theft loss deduction on Form 4684 due to a Ponzi-type investment scheme. Free online income tax filing See chapter 25. Free online income tax filing Home office deduction simplified method. Free online income tax filing  If you can take a home office deduction, you may be able to use a simplified method to figure it. Free online income tax filing See Publication 587. Free online income tax filing Standard mileage rates. Free online income tax filing  The 2013 rate for business use of your car is increased to 56½ cents a mile. Free online income tax filing See chapter 26. Free online income tax filing The 2013 rate for use of your car to get medical care is increased to 24 cents a mile. Free online income tax filing See chapter 21. Free online income tax filing The 2013 rate for use of your car to move is increased to 24 cents a mile. Free online income tax filing See Publication 521, Moving Expenses. Free online income tax filing Reminders Listed below are important reminders and other items that may help you file your 2013 tax return. Free online income tax filing Many of these items are explained in more detail later in this publication. Free online income tax filing Enter your social security number (SSN). Free online income tax filing  Enter your SSN in the space provided on your tax form. Free online income tax filing If you filed a joint return for 2012 and are filing a joint return for 2013 with the same spouse, enter your names and SSNs in the same order as on your 2012 return. Free online income tax filing See chapter 1. Free online income tax filing Secure your tax records from identity theft. Free online income tax filing  Identity theft occurs when someone uses your personal information, such as your name, SSN, or other identifying information, without your permission, to commit fraud or other crimes. Free online income tax filing An identity thief may use your SSN to get a job or may file a tax return using your SSN to receive a refund. Free online income tax filing For more information about identity theft and how to reduce your risk from it, see chapter 1. Free online income tax filing Taxpayer identification numbers. Free online income tax filing  You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. Free online income tax filing This applies even if the person was born in 2013. Free online income tax filing Generally, this number is the person's social security number (SSN). Free online income tax filing See chapter 1. Free online income tax filing Foreign source income. Free online income tax filing  If you are a U. Free online income tax filing S. Free online income tax filing citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by U. Free online income tax filing S. Free online income tax filing law. Free online income tax filing This is true whether you live inside or outside the United States and whether or not you receive a Form W-2 or Form 1099 from the foreign payer. Free online income tax filing This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents and royalties). Free online income tax filing If you live outside the United States, you may be able to exclude part or all of your foreign source earned income. Free online income tax filing For details, see Publication 54, Tax Guide for U. Free online income tax filing S. Free online income tax filing Citizens and Resident Aliens Abroad. Free online income tax filing Foreign financial assets. Free online income tax filing  If you had foreign financial assets in 2013, you may have to file Form 8938 with your return. Free online income tax filing Check www. Free online income tax filing IRS. Free online income tax filing gov/form8938 for details. Free online income tax filing Automatic 6-month extension to file tax return. Free online income tax filing  You can use Form 4868, Application for Automatic Extension of Time To File U. Free online income tax filing S. Free online income tax filing Individual Income Tax Return, to obtain an automatic 6-month extension of time to file your tax return. Free online income tax filing See chapter 1. Free online income tax filing Include your phone number on your return. Free online income tax filing  To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. Free online income tax filing Please enter your daytime telephone number on your tax form next to your signature and occupation. Free online income tax filing If you are filing a joint return, you can enter either your or your spouse's daytime phone number. Free online income tax filing Payment of taxes. Free online income tax filing   You can pay your taxes online, by phone, or by check or money order. Free online income tax filing You can make a direct transfer from your bank account or use a credit or debit card. Free online income tax filing If you e-file, you can schedule an electronic payment. Free online income tax filing See chapter 1. Free online income tax filing Faster ways to file your return. Free online income tax filing  The IRS offers fast, accurate ways to file your tax return information without filing a paper tax return. Free online income tax filing You can use IRS e-file (electronic filing). Free online income tax filing See chapter 1. Free online income tax filing Free electronic filing. Free online income tax filing  You may be able to file your 2013 taxes online for free. Free online income tax filing See chapter 1. Free online income tax filing Change of address. Free online income tax filing  If you change your address, you should notify the IRS. Free online income tax filing See Change of Address in chapter 1. Free online income tax filing Refund on a late filed return. Free online income tax filing  If you were due a refund but you did not file a return, you generally must file your return within 3 years from the date the return was due (including extensions) to get that refund. Free online income tax filing See chapter 1. Free online income tax filing Frivolous tax returns. Free online income tax filing  The IRS has published a list of positions that are identified as frivolous. Free online income tax filing The penalty for filing a frivolous tax return is $5,000. Free online income tax filing See chapter 1. Free online income tax filing Filing erroneous claim for refund or credit. Free online income tax filing  You may have to pay a penalty if you file an erroneous claim for refund or credit. Free online income tax filing See chapter 1. Free online income tax filing Privacy Act and paperwork reduction information. Free online income tax filing   The IRS Restructuring and Reform Act of 1998, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell you what our legal right is to ask for the information, why we are asking for it, how it will be used, what could happen if we do not receive it, and whether your response is voluntary, required to obtain a benefit, or mandatory under the law. Free online income tax filing A complete statement on this subject can be found in your tax form instructions. Free online income tax filing Customer service for taxpayers. Free online income tax filing  You can set up a personal appointment at the most convenient Taxpayer Assistance Center, on the most convenient business day. Free online income tax filing See How To Get Tax Help in the back of this publication. Free online income tax filing Preparer e-file mandate. Free online income tax filing  Most paid preparers must e-file returns they prepare and file. Free online income tax filing Your preparer may make you aware of this requirement and the options available to you. Free online income tax filing Treasury Inspector General for Tax Administration. Free online income tax filing   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (call 1-800-877-8339 if you are deaf, hard of hearing, or have a speech disability, and are using TTY/TDD equipment). Free online income tax filing You can remain anonymous. Free online income tax filing Photographs of missing children. Free online income tax filing  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free online income tax filing Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free online income tax filing You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free online income tax filing Introduction This publication covers the general rules for filing a federal income tax return. Free online income tax filing It supplements the information contained in your tax form instructions. Free online income tax filing It explains the tax law to make sure you pay only the tax you owe and no more. Free online income tax filing How this publication is arranged. Free online income tax filing   This publication closely follows Form 1040, U. Free online income tax filing S. Free online income tax filing Individual Income Tax Return. Free online income tax filing It is divided into six parts which cover different sections of Form 1040. Free online income tax filing Each part is further divided into chapters which generally discuss one line of the form. Free online income tax filing Do not worry if you file Form 1040A or Form 1040EZ. Free online income tax filing Anything included on a line of either of these forms is also included on Form 1040. Free online income tax filing   The table of contents inside the front cover and the index in the back of the publication are useful tools to help you find the information you need. Free online income tax filing What is in this publication. Free online income tax filing   The publication begins with the rules for filing a tax return. Free online income tax filing It explains: Who must file a return, Which tax form to use, When the return is due, How to e-file your return, and Other general information. Free online income tax filing It will help you identify which filing status you qualify for, whether you can claim any dependents, and whether the income you receive is taxable. Free online income tax filing The publication goes on to explain the standard deduction, the kinds of expenses you may be able to deduct, and the various kinds of credits you may be able to take to reduce your tax. Free online income tax filing   Throughout the publication are examples showing how the tax law applies in typical situations. Free online income tax filing Also throughout the publication are flowcharts and tables that present tax information in an easy-to-understand manner. Free online income tax filing   Many of the subjects discussed in this publication are discussed in greater detail in other IRS publications. Free online income tax filing References to those other publications are provided for your information. Free online income tax filing Icons. Free online income tax filing   Small graphic symbols, or icons, are used to draw your attention to special information. Free online income tax filing See Table 1 later for an explanation of each icon used in this publication. Free online income tax filing What is not covered in this publication. Free online income tax filing   Some material that you may find helpful is not included in this publication but can be found in your tax form instruction booklet. Free online income tax filing This includes lists of: Where to report certain items shown on information documents, and Recorded tax information topics (TeleTax). Free online income tax filing   If you operate your own business or have other self-employment income, such as from babysitting or selling crafts, see the following publications for more information. Free online income tax filing Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). Free online income tax filing Publication 535, Business Expenses. Free online income tax filing Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free online income tax filing Help from the IRS. Free online income tax filing   There are many ways you can get help from the IRS. Free online income tax filing These are explained under How To Get Tax Help in the back of this publication. Free online income tax filing Comments and suggestions. Free online income tax filing   We welcome your comments about this publication and your suggestions for future editions. Free online income tax filing   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free online income tax filing NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free online income tax filing Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free online income tax filing   You can send your comments from www. Free online income tax filing irs. Free online income tax filing gov/formspubs/. Free online income tax filing Click on “More Information” and then on “Comment on Tax Forms and Publications”. Free online income tax filing   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free online income tax filing Ordering forms and publications. Free online income tax filing   Visit www. Free online income tax filing irs. Free online income tax filing gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free online income tax filing Internal Revenue Service 1201 N. Free online income tax filing Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free online income tax filing   If you have a tax question, check the information available on IRS. Free online income tax filing gov or call 1-800-829-1040. Free online income tax filing We cannot answer tax questions sent to either of the above addresses. Free online income tax filing IRS mission. Free online income tax filing   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Free online income tax filing Table 1. Free online income tax filing Legend of Icons Icon Explanation Items that may cause you particular problems, or an alert about pending legislation that may be enacted after this publication goes to print. Free online income tax filing An Internet site or an email address. Free online income tax filing An address you may need. Free online income tax filing Items you should keep in your personal records. Free online income tax filing Items you may need to figure or a worksheet you may need to complete and keep for your records. Free online income tax filing An important phone number. Free online income tax filing Helpful information you may need. 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The only proven way to help you lose weight is to burn more calories than you consume. If you need to lose weight, talk with your doctor about the options that are best for you. Most health experts agree that the best and safest way to lose weight is to modestly cut calories, eat a balanced diet, and exercise. People usually do best when they reduce their usual calorie intake or increase the calories they use by 500-1,000 per day. This allows you to eat enough for good nutrition yet lose about one to two pounds a week. Steer clear of harmful tactics such as smoking, fasting, purging, or abusing laxatives.

Avoid fad diets and other weight loss programs that promise fast results or limit your food choices. Ask yourself the following:

  • How does the product or service work? Does the program emphasize diet, exercise or a combination of both?
  • How much will it cost? Ask for an itemized list that includes membership fees and fees for weekly visits. Ask if there are extra fees for diagnostic tests, food, dietary supplements, or other products in the program.
  • How well does it work? Ask to see the studies that back up success claims. Look for how many people completed the program, how much weight they lost, and how long they kept the weight off.
  • What are the risks? Get details about possible side effects. Check with your doctor before you take prescriptions, over-the-counter weight loss drugs, or dietary supplements. Diets that require drastic food restriction should be under the supervision of a physician.
  • How many calories will you eat each day? For diets under 1,500 calories, be sure to check with your doctor to make sure you get all your nutrients.
  • What are the staff qualifications? Ask about their training and experience.
  • What type of attention will you receive? Will you get individual counseling or group support? How often?

Complaints concerning fraudulent weight loss claims should be directed to the Federal Trade Commission.

Cancelling Gym Memberships

Signing up for a gym membership can be a great step, but it is important to know what commitments you are making before you sign on the dotted line. For example:

  • Read the contract. Pay attention to cancellation policies, including whether there is an "exit fee" for breaking the agreement.
  • Know your state's laws. Many states have consumer protections that offer a "cooling-off period" during which you can back out of contracts, including gym memberships. However, these laws vary from state to state.
  • Know your gym's rules. Some gyms grant waivers if you are temporarily incapacitated, out of the area for an extended period, or move a certain distance away. These rules vary from gym to gym.
  • Cancel in writing
  • Always put your intention to cancel in writing, even if you are advised that is not necessary, and keep a copy of your letter. Make sure you follow the advance notice requirements in your contract.

The Free Online Income Tax Filing

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