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

The IRS, in a continuing effort to increase tax compliance and at the same time reduce taxpayer burden, has expanded its MSU Program into other industries. The newest additions are new voluntary compliance agreements for all industries where tipping is customary.

These voluntary compliance agreements are designed to enhance tax compliance among tipped employees through taxpayer education instead of through traditional enforcement actions, such as tip examinations.

Tip agreements available are:

EmTRAC - Employer-designed Tip Reporting Alternative Commitment (PDF). Taxpayers in the Food and beverage industry designing their own tip compliance program in conjunction with the IRS.

Page Last Reviewed or Updated: 27-Dec-2013

The 1040x Irs

1040x irs 10. 1040x irs   Education Savings Bond Program Table of Contents Introduction Who Can Cash In Bonds Tax FreeAdjusted qualified education expenses. 1040x irs Eligible educational institution. 1040x irs Dependent for whom you claim an exemption. 1040x irs MAGI when using Form 1040A. 1040x irs MAGI when using Form 1040. 1040x irs Figuring the Tax-Free AmountEffect of the Amount of Your Income on the Amount of Your Exclusion Claiming the Exclusion Introduction Generally, you must pay tax on the interest earned on U. 1040x irs S. 1040x irs savings bonds. 1040x irs If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds. 1040x irs However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income. 1040x irs Who Can Cash In Bonds Tax Free You may be able to cash in qualified U. 1040x irs S. 1040x irs savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions. 1040x irs You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return. 1040x irs Your modified adjusted gross income (MAGI) is less than the amount specified for your filing status. 1040x irs Your filing status is not married filing separately. 1040x irs Qualified U. 1040x irs S. 1040x irs savings bonds. 1040x irs   A qualified U. 1040x irs S. 1040x irs savings bond is a series EE bond issued after 1989 or a series I bond. 1040x irs The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners). 1040x irs   The owner must be at least 24 years old before the bond's issue date. 1040x irs The issue date is printed on the front of the savings bond. 1040x irs    The issue date is not necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically). 1040x irs Qualified education expenses. 1040x irs   These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption. 1040x irs Tuition and fees required to enroll at or attend an eligible educational institution. 1040x irs Qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. 1040x irs Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8, Qualified Tuition Program). 1040x irs Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7, Coverdell Education Savings Account). 1040x irs Adjusted qualified education expenses. 1040x irs   You must reduce your qualified education expenses by all of the following tax-free benefits. 1040x irs Tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). 1040x irs Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7, Coverdell Education Savings Account). 1040x irs Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8, Qualified Tuition Program). 1040x irs Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), or Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ). 1040x irs Any expenses used in figuring the American opportunity and lifetime learning credits. 1040x irs See What Expenses Qualify in chapter 2, American Opportunity Credit, and What Expenses Qualify in chapter 3, Lifetime Learning Credit, for more information. 1040x irs Eligible educational institution. 1040x irs   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040x irs S. 1040x irs Department of Education. 1040x irs It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040x irs The educational institution should be able to tell you if it is an eligible educational institution. 1040x irs   Certain educational institutions located outside the United States also participate in the U. 1040x irs S. 1040x irs Department of Education's Federal Student Aid (FSA) programs. 1040x irs Dependent for whom you claim an exemption. 1040x irs   You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c. 1040x irs Modified adjusted gross income (MAGI). 1040x irs   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. 1040x irs However, as discussed below, there may be other modifications. 1040x irs MAGI when using Form 1040A. 1040x irs   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). 1040x irs MAGI when using Form 1040. 1040x irs   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, Exclusion of income by bona fide residents of Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for student loan interest, Deduction for tuition and fees, and Deduction for domestic production activities. 1040x irs    Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. 1040x irs If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. 1040x irs Do not add in the deduction for (7) student loan interest, and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. 1040x irs Enter the total on Form 8815, line 9, as your modified adjusted gross income (MAGI). 1040x irs    Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you cannot figure the deduction until you have figured this interest exclusion. 1040x irs Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. 1040x irs See Royalties included in MAGI under Education Savings Bond Program in Publication 550, chapter 1. 1040x irs Figuring the Tax-Free Amount If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. 1040x irs However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free. 1040x irs To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. 1040x irs The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. 1040x irs The denominator (bottom part) of the fraction is the total proceeds you received during the year. 1040x irs Example. 1040x irs In February 2013, Mark and Joan Washington, a married couple, cashed a qualified series EE U. 1040x irs S. 1040x irs savings bond. 1040x irs They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. 1040x irs In 2013, they paid $7,650 of their daughter's college tuition. 1040x irs They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. 1040x irs Their MAGI for 2013 was $80,000. 1040x irs   $3,000 interest × $7,650 AQEE  $9,000 proceeds = $2,550 tax-free interest   They can exclude $2,550 of interest in 2013. 1040x irs They must pay tax on the remaining $450 ($3,000 − $2,550) interest. 1040x irs Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually reduced (phased out) based on your MAGI and filing status. 1040x irs Claiming the Exclusion Use Form 8815 to figure your education savings bond interest exclusion. 1040x irs Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. 1040x irs Attach Form 8815 to your tax return. 1040x irs Prev  Up  Next   Home   More Online Publications