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2012 Tax Form 1040ez

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2012 Tax Form 1040ez

2012 tax form 1040ez Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. 2012 tax form 1040ez Dispositions — mass asset accounts. 2012 tax form 1040ez Early dispositions — 15-year real property. 2012 tax form 1040ez Early dispositions — 18- and 19-year real property. 2012 tax form 1040ez Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. 2012 tax form 1040ez It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. 2012 tax form 1040ez These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. 2012 tax form 1040ez If you placed property in service during this period, you must continue to figure your depreciation under ACRS. 2012 tax form 1040ez If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. 2012 tax form 1040ez Listed property includes cars, other means of transportation, and certain computers. 2012 tax form 1040ez Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. 2012 tax form 1040ez ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. 2012 tax form 1040ez It does not matter that the underlying property is depreciated under ACRS or one of the other methods. 2012 tax form 1040ez ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. 2012 tax form 1040ez The alternate ACRS method used a recovery percentage based on a modified straight line method. 2012 tax form 1040ez The law prescribes fixed percentages to be uses for each class of property. 2012 tax form 1040ez Property depreciable under ACRS is called recovery property. 2012 tax form 1040ez The recovery class of property determines the recovery period. 2012 tax form 1040ez Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. 2012 tax form 1040ez Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. 2012 tax form 1040ez To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. 2012 tax form 1040ez You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. 2012 tax form 1040ez For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. 2012 tax form 1040ez What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. 2012 tax form 1040ez It includes new or used and real or personal property. 2012 tax form 1040ez The property must be for use in a trade or business or for the production of income. 2012 tax form 1040ez Property you acquired before 1981 or after 1986 is not ACRS recovery property. 2012 tax form 1040ez For information on depreciating property acquired before 1981, see chapter 2. 2012 tax form 1040ez For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. 2012 tax form 1040ez Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. 2012 tax form 1040ez It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. 2012 tax form 1040ez Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. 2012 tax form 1040ez Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. 2012 tax form 1040ez Intangible property. 2012 tax form 1040ez   Intangible property is not depreciated under ACRS. 2012 tax form 1040ez Property depreciated under methods not expressed in a term of years. 2012 tax form 1040ez   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. 2012 tax form 1040ez This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). 2012 tax form 1040ez Public utility property. 2012 tax form 1040ez   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. 2012 tax form 1040ez Additions or improvements to ACRS property after 1986. 2012 tax form 1040ez   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. 2012 tax form 1040ez ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. 2012 tax form 1040ez It does not matter that the underlying property is depreciated under ACRS or one of the other methods. 2012 tax form 1040ez How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. 2012 tax form 1040ez Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. 2012 tax form 1040ez Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. 2012 tax form 1040ez Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. 2012 tax form 1040ez However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. 2012 tax form 1040ez If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. 2012 tax form 1040ez If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. 2012 tax form 1040ez See Publication 551. 2012 tax form 1040ez Classes of Recovery Property All recovery property under ACRS is in one of the following classes. 2012 tax form 1040ez The class for your property was determined when you began to depreciate it. 2012 tax form 1040ez 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. 2012 tax form 1040ez Race horses over 2 years old when placed in service are 3-year property. 2012 tax form 1040ez Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. 2012 tax form 1040ez The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. 2012 tax form 1040ez You cannot claim depreciation for this property after 1988. 2012 tax form 1040ez 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. 2012 tax form 1040ez It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). 2012 tax form 1040ez The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. 2012 tax form 1040ez You cannot claim depreciation for this property after 1990. 2012 tax form 1040ez 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. 2012 tax form 1040ez Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. 2012 tax form 1040ez You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. 2012 tax form 1040ez For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. 2012 tax form 1040ez The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. 2012 tax form 1040ez Example. 2012 tax form 1040ez On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. 2012 tax form 1040ez You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. 2012 tax form 1040ez On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. 2012 tax form 1040ez The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). 2012 tax form 1040ez Your ACRS deduction was $3,000 (8% × $37,500). 2012 tax form 1040ez In 1987, your ACRS deduction was $5,250 (14% × $37,500). 2012 tax form 1040ez In 1988, your ACRS deduction was $4,500 (12% × $37,500). 2012 tax form 1040ez In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). 2012 tax form 1040ez In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). 2012 tax form 1040ez 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. 2012 tax form 1040ez It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. 2012 tax form 1040ez Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. 2012 tax form 1040ez You could group 15-year real property by month and year placed in service. 2012 tax form 1040ez In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. 2012 tax form 1040ez You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. 2012 tax form 1040ez Example. 2012 tax form 1040ez On March 5, 1984, you placed an apartment building in service in your business. 2012 tax form 1040ez It is 15-year real property. 2012 tax form 1040ez After subtracting the value of the land, your unadjusted basis in the building is $250,000. 2012 tax form 1040ez You use the calendar year as your tax year. 2012 tax form 1040ez March is the third month of your tax year. 2012 tax form 1040ez Your ACRS deduction for 1984 was $25,000 (10% × $250,000). 2012 tax form 1040ez For 1985, the percentage for the third month of the second year of the recovery period is 11%. 2012 tax form 1040ez Your deduction was $27,500 (11% × $250,000). 2012 tax form 1040ez For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. 2012 tax form 1040ez For 1989 through 1992, the percentage for the third month is 6%. 2012 tax form 1040ez Your deduction each year is $15,000 (6% × $250,000). 2012 tax form 1040ez For 1993, 1994, and 1995, the percentage for the third month is 5%. 2012 tax form 1040ez Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. 2012 tax form 1040ez Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. 2012 tax form 1040ez Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. 2012 tax form 1040ez Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. 2012 tax form 1040ez Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 2012 tax form 1040ez The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. 2012 tax form 1040ez Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. 2012 tax form 1040ez Use the percentages listed under that month for each year of the recovery period. 2012 tax form 1040ez Table 2 shows percentages for low-income housing placed in service before May 9, 1985. 2012 tax form 1040ez Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. 2012 tax form 1040ez Example. 2012 tax form 1040ez In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. 2012 tax form 1040ez You use the calendar year as your tax year. 2012 tax form 1040ez You use Table C–3 because the property was placed in service after May 8, 1985. 2012 tax form 1040ez Your unadjusted basis for the property, not including the land, was $59,000. 2012 tax form 1040ez Your deduction for 1986 through 2001 is shown in the following table. 2012 tax form 1040ez Year Rate Deduction 1986 8. 2012 tax form 1040ez 9% $5,251 1987 12. 2012 tax form 1040ez 1% 7,139 1988 10. 2012 tax form 1040ez 5% 6,195 1989 9. 2012 tax form 1040ez 1% 5,369 1990 7. 2012 tax form 1040ez 9% 4,661 1991 6. 2012 tax form 1040ez 9% 4,071 1992 5. 2012 tax form 1040ez 9% 3,481 1993 5. 2012 tax form 1040ez 2% 3,068 1994 4. 2012 tax form 1040ez 6% 2,714 1995 4. 2012 tax form 1040ez 6% 2,714 1996 4. 2012 tax form 1040ez 6% 2,714 1997 4. 2012 tax form 1040ez 6% 2,714 1998 4. 2012 tax form 1040ez 6% 2,714 1999 4. 2012 tax form 1040ez 5% 2,655 2000 4. 2012 tax form 1040ez 5% 2,655 2001 1. 2012 tax form 1040ez 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. 2012 tax form 1040ez It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. 2012 tax form 1040ez The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. 2012 tax form 1040ez There are also tables for 18-year real property in the Appendix. 2012 tax form 1040ez Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. 2012 tax form 1040ez Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. 2012 tax form 1040ez Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. 2012 tax form 1040ez Use the percentages listed under that month for each year of the recovery period. 2012 tax form 1040ez Example. 2012 tax form 1040ez On April 28, 1985, you bought and placed in service a rental house. 2012 tax form 1040ez The house, not including the land, cost $95,000. 2012 tax form 1040ez This is your unadjusted basis for the house. 2012 tax form 1040ez You use the calendar year as your tax year. 2012 tax form 1040ez Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. 2012 tax form 1040ez You use Table 4 to figure your deduction for the house. 2012 tax form 1040ez April is the fourth month of your tax year. 2012 tax form 1040ez Your deduction for 1985 through 2003 is shown in the following table. 2012 tax form 1040ez Year Rate Deduction 1985 7. 2012 tax form 1040ez 0% $6,650 1986 9. 2012 tax form 1040ez 0% 8,550 1987 8. 2012 tax form 1040ez 0% 7,600 1988 7. 2012 tax form 1040ez 0% 6,650 1989 7. 2012 tax form 1040ez 0% 6,650 1990 6. 2012 tax form 1040ez 0% 5,700 1991 5. 2012 tax form 1040ez 0% 4,750 1992 5. 2012 tax form 1040ez 0% 4,750 1993 5. 2012 tax form 1040ez 0% 4,750 1994 5. 2012 tax form 1040ez 0% 4,750 1995 5. 2012 tax form 1040ez 0% 4,750 1996 5. 2012 tax form 1040ez 0% 4,750 1997 5. 2012 tax form 1040ez 0% 4,750 1998 4. 2012 tax form 1040ez 0% 3,800 1999 4. 2012 tax form 1040ez 0% 3,800 2000 4. 2012 tax form 1040ez 0% 3,800 2001 4. 2012 tax form 1040ez 0% 3,800 2002 4. 2012 tax form 1040ez 0% 3,800 2003 1. 2012 tax form 1040ez 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. 2012 tax form 1040ez It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. 2012 tax form 1040ez The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. 2012 tax form 1040ez Table 6 shows the percentages for 19-year real property. 2012 tax form 1040ez You find the month in your tax year that you placed the property in service. 2012 tax form 1040ez You use the percentages listed under that month for each year of the recovery period. 2012 tax form 1040ez Recovery Periods Each item of recovery property is assigned to a class of property. 2012 tax form 1040ez The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. 2012 tax form 1040ez The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. 2012 tax form 1040ez This alternate ACRS method uses a recovery percentage based on a modified straight line method. 2012 tax form 1040ez This alternate ACRS method generally uses percentages other than those from the tables. 2012 tax form 1040ez If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. 2012 tax form 1040ez This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. 2012 tax form 1040ez   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. 2012 tax form 1040ez 00% 10 years 10. 2012 tax form 1040ez 00% 12 years 8. 2012 tax form 1040ez 333% 15 years 6. 2012 tax form 1040ez 667% 25 years 4. 2012 tax form 1040ez 00% 35 years 2. 2012 tax form 1040ez 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. 2012 tax form 1040ez There are tables for 18- and 19-year real property later in this publication in the Appendix. 2012 tax form 1040ez For 15-year real property, see 15-year real property, later. 2012 tax form 1040ez 3-, 5-, and 10-year property. 2012 tax form 1040ez   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. 2012 tax form 1040ez This applies throughout the recovery period you selected. 2012 tax form 1040ez Half-year convention. 2012 tax form 1040ez   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. 2012 tax form 1040ez This applied regardless of when in the tax year you placed the property in service. 2012 tax form 1040ez For each of the remaining years in the recovery period, you take a full year's deduction. 2012 tax form 1040ez If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. 2012 tax form 1040ez Example. 2012 tax form 1040ez You operate a small upholstery business. 2012 tax form 1040ez On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. 2012 tax form 1040ez You elected to use the alternate ACRS method. 2012 tax form 1040ez You did not elect to take a section 179 deduction. 2012 tax form 1040ez You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. 2012 tax form 1040ez The saw is 5-year property, but you decided to recover its cost over 12 years. 2012 tax form 1040ez For 1986, your ACRS deduction reflected the half-year convention. 2012 tax form 1040ez In the first year, you deducted half of the amount determined for a full year. 2012 tax form 1040ez Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. 2012 tax form 1040ez 00     Electric saw   12 years straight line = 8. 2012 tax form 1040ez 333% 8. 2012 tax form 1040ez 333% ÷ $500 = $41. 2012 tax form 1040ez 67 Half-year convention -½ of $41. 2012 tax form 1040ez 67= 20. 2012 tax form 1040ez 84 Total ACRS deduction for 1986 $1,320. 2012 tax form 1040ez 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. 2012 tax form 1040ez Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. 2012 tax form 1040ez 333% 8. 2012 tax form 1040ez 333% ÷ $500 = $41. 2012 tax form 1040ez 67 Total annual ACRS deduction for 1987 through 1990 $2,641. 2012 tax form 1040ez 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. 2012 tax form 1040ez Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. 2012 tax form 1040ez 00     Electric saw   12 years straight line = 8. 2012 tax form 1040ez 333% 8. 2012 tax form 1040ez 333% ÷ $500 = $41. 2012 tax form 1040ez 67 Total ACRS deduction for 1991 $1,341. 2012 tax form 1040ez 67       The truck is fully depreciated after 1991. 2012 tax form 1040ez You take a full year of depreciation for the saw for the years 1992 through 1997. 2012 tax form 1040ez Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. 2012 tax form 1040ez 333% 8. 2012 tax form 1040ez 333% ÷ $500 = $41. 2012 tax form 1040ez 67 Total annual ACRS deduction for 1992 through 1997 $41. 2012 tax form 1040ez 67       You take a half-year of depreciation for the saw for 1998. 2012 tax form 1040ez Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. 2012 tax form 1040ez 333% 8. 2012 tax form 1040ez 333% ÷ $500 = $41. 2012 tax form 1040ez 67 Half-year convention -½ of $41. 2012 tax form 1040ez 67= 20. 2012 tax form 1040ez 84 Total ACRS deduction for 1998 $20. 2012 tax form 1040ez 84       The saw is fully depreciated after 1998. 2012 tax form 1040ez 15-year real property. 2012 tax form 1040ez   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. 2012 tax form 1040ez The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. 2012 tax form 1040ez If you selected a 15-year recovery period, you use the percentage (6. 2012 tax form 1040ez 667%) from the schedule above. 2012 tax form 1040ez You prorate this percentage for the number of months the property was in service in the first year. 2012 tax form 1040ez If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. 2012 tax form 1040ez Alternate periods for 18-year real property. 2012 tax form 1040ez   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. 2012 tax form 1040ez The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. 2012 tax form 1040ez There are two tables for each alternate recovery period. 2012 tax form 1040ez One table shows the percentage for property placed in service after June 22, 1984. 2012 tax form 1040ez The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. 2012 tax form 1040ez Alternate periods for 19-year real property. 2012 tax form 1040ez   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. 2012 tax form 1040ez If you selected a 19-year recovery period, use Table 9 to determine your deduction. 2012 tax form 1040ez If you select a 35- or 45-year recovery period, use either Table 13 or 14. 2012 tax form 1040ez Example. 2012 tax form 1040ez You placed in service an apartment building on August 3, 1986. 2012 tax form 1040ez The building is 19-year real property. 2012 tax form 1040ez The sales contract allocated $300,000 to the building and $100,000 to the land. 2012 tax form 1040ez You use the calendar year as your tax year. 2012 tax form 1040ez You chose the alternate ACRS method over a recovery period of 35 years. 2012 tax form 1040ez For 1986, you figure your ACRS deduction usingTable 13. 2012 tax form 1040ez August is the eighth month of your tax year. 2012 tax form 1040ez The percentage from Table 13 for the eighth month is 1. 2012 tax form 1040ez 1%. 2012 tax form 1040ez Your deduction was $3,300 ($300,000 ÷ 1. 2012 tax form 1040ez 1%). 2012 tax form 1040ez The deduction rate from ACRS Table 13 for years 2 through 20 is 2. 2012 tax form 1040ez 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. 2012 tax form 1040ez 9%). 2012 tax form 1040ez Alternate periods for low-income housing. 2012 tax form 1040ez   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. 2012 tax form 1040ez If you selected a 15-year period for this property, use 6. 2012 tax form 1040ez 667% as the percentage. 2012 tax form 1040ez If you selected a 35- or 45-year period, use either Table 11, 12, or 15. 2012 tax form 1040ez Election. 2012 tax form 1040ez   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. 2012 tax form 1040ez Revocation of election. 2012 tax form 1040ez   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. 2012 tax form 1040ez The Commissioner grants consent only in extraordinary circumstances. 2012 tax form 1040ez Any request for a revocation will be considered a request for a ruling. 2012 tax form 1040ez ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. 2012 tax form 1040ez Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. 2012 tax form 1040ez You figure this by multiplying the unadjusted basis by the recovery percentage. 2012 tax form 1040ez You then multiply the ACRS deduction determined for a full tax year by a fraction. 2012 tax form 1040ez The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. 2012 tax form 1040ez For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. 2012 tax form 1040ez The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. 2012 tax form 1040ez The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. 2012 tax form 1040ez The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). 2012 tax form 1040ez You use the full ACRS percentages during the remaining years of the recovery period. 2012 tax form 1040ez For the first tax year after the recovery period, the unrecovered basis will be deductible. 2012 tax form 1040ez Exception. 2012 tax form 1040ez   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. 2012 tax form 1040ez You compute the number of months using either a full month or mid-month convention. 2012 tax form 1040ez This is true regardless of the number of months in the tax year and the recovery period and method used. 2012 tax form 1040ez Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. 2012 tax form 1040ez You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. 2012 tax form 1040ez You generally recognize gain or loss on the disposition of an asset by sale. 2012 tax form 1040ez However, nonrecognition rules can allow you to postpone some gain. 2012 tax form 1040ez See Publication 544. 2012 tax form 1040ez If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. 2012 tax form 1040ez Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. 2012 tax form 1040ez Early dispositions. 2012 tax form 1040ez   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. 2012 tax form 1040ez When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. 2012 tax form 1040ez Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. 2012 tax form 1040ez   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. 2012 tax form 1040ez This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. 2012 tax form 1040ez Dispositions — mass asset accounts. 2012 tax form 1040ez   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. 2012 tax form 1040ez A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. 2012 tax form 1040ez Examples of mass assets include minor items of office, plant, and store furniture and fixtures. 2012 tax form 1040ez   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. 2012 tax form 1040ez You leave the unadjusted basis of the property in the account until recovered in future years. 2012 tax form 1040ez If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. 2012 tax form 1040ez Early dispositions — 15-year real property. 2012 tax form 1040ez   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. 2012 tax form 1040ez You use a full-month convention. 2012 tax form 1040ez For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. 2012 tax form 1040ez This applies whether you use the regular ACRS method or elected the alternate ACRS method. 2012 tax form 1040ez Example. 2012 tax form 1040ez You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). 2012 tax form 1040ez You file your return based on a calendar year. 2012 tax form 1040ez Your rate from Table 1 for the third month is 10%. 2012 tax form 1040ez Your ACRS deduction for 1984 was $9,800 ($98. 2012 tax form 1040ez 000 ÷ 10%). 2012 tax form 1040ez For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. 2012 tax form 1040ez For 1989 through 1992, you figured your ACRS deductions using 6% for each year. 2012 tax form 1040ez The deduction each year was $98,000 ÷ 6%. 2012 tax form 1040ez For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. 2012 tax form 1040ez You sell the house on June 1, 1995. 2012 tax form 1040ez You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. 2012 tax form 1040ez The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). 2012 tax form 1040ez You then prorate this amount to the 5 months in 1995 during which it was rented. 2012 tax form 1040ez Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). 2012 tax form 1040ez Early dispositions — 18- and 19-year real property. 2012 tax form 1040ez   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. 2012 tax form 1040ez For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. 2012 tax form 1040ez For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. 2012 tax form 1040ez Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. 2012 tax form 1040ez Count the month of disposition as half a month of use. 2012 tax form 1040ez Example. 2012 tax form 1040ez You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). 2012 tax form 1040ez You file your return based on a calendar year. 2012 tax form 1040ez Your rate from Table 4 for the seventh month is 4%. 2012 tax form 1040ez You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). 2012 tax form 1040ez In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. 2012 tax form 1040ez You sell the house on September 24, 1995. 2012 tax form 1040ez Figure your ACRS deduction for 1995 for the months of use. 2012 tax form 1040ez The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). 2012 tax form 1040ez Prorate this amount for the 8. 2012 tax form 1040ez 5 months in 1995 that you held the property. 2012 tax form 1040ez Under the mid-month convention, you count September as half a month. 2012 tax form 1040ez Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. 2012 tax form 1040ez 5/12). 2012 tax form 1040ez Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. 2012 tax form 1040ez Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. 2012 tax form 1040ez This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. 2012 tax form 1040ez You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. 2012 tax form 1040ez Section 1245 property generally includes all personal property. 2012 tax form 1040ez See Section 1245 property in chapter 4 of Publication 544 for more information. 2012 tax form 1040ez You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. 2012 tax form 1040ez You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. 2012 tax form 1040ez Section 1250 property includes most real property. 2012 tax form 1040ez See Section 1250 property in chapter 4 of Publication 544 for more information. 2012 tax form 1040ez This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. 2012 tax form 1040ez Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. 2012 tax form 1040ez Any 15-, 18-, or 19-year real property that is subsidized low-income housing. 2012 tax form 1040ez For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. 2012 tax form 1040ez See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. 2012 tax form 1040ez Prev  Up  Next   Home   More Online Publications
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Foreign Account Tax Compliance Act

ALERT  

Regulations coordinating chapters 3, 4, 61, and section 3406 of the Internal Revenue Code and revising the final FATCA regulations have been posted to the Federal Register for publication.

See below for links to the new final and temporary regulations (and the associated notices of proposed rulemaking by cross-reference). Please note: Clicking any of the Federal Register publication links below will direct you first to an intermediate web page advising that you are leaving the IRS website. Click the button indicating you wish to leave the IRS website. 

Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons, Information Reporting and Backup Withholding on Payments Made to Certain U.S. Persons, and Portfolio Interest Treatment Pages 12725 - 12809 [FR DOC # 2014-03991]

Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities Pages 12811 - 12865 [FR DOC # 2014-03967]

Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities Pages 12867 - 12878 [FR DOC # 2014-03960]

Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Revision of Information Reporting and Backup Withholding Regulations Pages 12879 - 12888 [FR DOC # 2014-03990]

The following FATCA Forms and Instructions for 2014 are now available on the IRS.GOV Forms and Publications Website:  

  • Form 1042 - Use the 2013 form.  Learn more.
  • Form 1042-S
  • Form 8966
  • Form W-8BEN - Use the 2013 form.  Learn more.
  • Instructions to Form W-8BEN
  • Form W-8ECI
  • Instructions to Form W-8ECI

Click here to access IRS.GOV Forms and Publications Website.

The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March 2010.
  • FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts
  • FATCA focuses on reporting:
 
  • By U.S. taxpayers about certain foreign financial accounts and offshore assets
 
  • By foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest
  • The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.
Individuals
 
Financial Institutions
 
Governments

 
U.S. individual taxpayers must report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold.


Form 8938 reporting is in addition to FBAR reporting.
 

 
   
Foreign
To avoid being withheld upon, a foreign financial institution may register with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report certain information on U.S. accounts to the IRS.

U.S.
U.S. financial institutions and other U.S withholding agents must both withhold 30% on certain payments to foreign entities that do not document their FATCA status and report information about certain non-financial foreign entities.
 
   
If a jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified. Such financial institutions will not be subject to withholding under FATCA.
 

 

Page Last Reviewed or Updated: 19-Mar-2014

The 2012 Tax Form 1040ez

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