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Amend Tax Return Instructions

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Amend Tax Return Instructions

Amend tax return instructions 23. Amend tax return instructions   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Amend tax return instructions Mortgage proceeds used for business or investment. Amend tax return instructions Introduction This chapter discusses what interest expenses you can deduct. Amend tax return instructions Interest is the amount you pay for the use of borrowed money. Amend tax return instructions The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Amend tax return instructions Home mortgage interest, including certain points and mortgage insurance premiums. Amend tax return instructions Investment interest. Amend tax return instructions This chapter explains these deductions. Amend tax return instructions It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Amend tax return instructions Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Amend tax return instructions Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Amend tax return instructions The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Amend tax return instructions You can deduct home mortgage interest if all the following conditions are met. Amend tax return instructions You file Form 1040 and itemize deductions on Schedule A (Form 1040). Amend tax return instructions The mortgage is a secured debt on a qualified home in which you have an ownership interest. Amend tax return instructions (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Amend tax return instructions The term “qualified home” means your main home or second home. Amend tax return instructions For details, see Publication 936. Amend tax return instructions )  Both you and the lender must intend that the loan be repaid. Amend tax return instructions Amount Deductible In most cases, you can deduct all of your home mortgage interest. Amend tax return instructions How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Amend tax return instructions Fully deductible interest. Amend tax return instructions   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Amend tax return instructions (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Amend tax return instructions )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Amend tax return instructions Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Amend tax return instructions Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Amend tax return instructions The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Amend tax return instructions   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Amend tax return instructions    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Amend tax return instructions Figure 23-A. Amend tax return instructions Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Amend tax return instructions Figure 23-A. Amend tax return instructions Is My Interest Fully Deductible? Limits on deduction. Amend tax return instructions   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Amend tax return instructions If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Amend tax return instructions Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Amend tax return instructions It also describes certain special situations that may affect your deduction. Amend tax return instructions Late payment charge on mortgage payment. Amend tax return instructions   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Amend tax return instructions Mortgage prepayment penalty. Amend tax return instructions   If you pay off your home mortgage early, you may have to pay a penalty. Amend tax return instructions You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Amend tax return instructions Sale of home. Amend tax return instructions   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. Amend tax return instructions Example. Amend tax return instructions John and Peggy Harris sold their home on May 7. Amend tax return instructions Through April 30, they made home mortgage interest payments of $1,220. Amend tax return instructions The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Amend tax return instructions Their mortgage interest deduction is $1,270 ($1,220 + $50). Amend tax return instructions Prepaid interest. Amend tax return instructions   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Amend tax return instructions You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Amend tax return instructions However, there is an exception that applies to points, discussed later. Amend tax return instructions Mortgage interest credit. Amend tax return instructions   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Amend tax return instructions Figure the credit on Form 8396, Mortgage Interest Credit. Amend tax return instructions If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Amend tax return instructions   For more information on the credit, see chapter 37. Amend tax return instructions Ministers' and military housing allowance. Amend tax return instructions   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Amend tax return instructions Hardest Hit Fund and Emergency Homeowners' Loan Programs. Amend tax return instructions   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Amend tax return instructions You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Amend tax return instructions You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Amend tax return instructions If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Amend tax return instructions However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Amend tax return instructions Mortgage assistance payments under section 235 of the National Housing Act. Amend tax return instructions   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Amend tax return instructions You cannot deduct the interest that is paid for you. Amend tax return instructions No other effect on taxes. Amend tax return instructions   Do not include these mortgage assistance payments in your income. Amend tax return instructions Also, do not use these payments to reduce other deductions, such as real estate taxes. Amend tax return instructions Divorced or separated individuals. Amend tax return instructions   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Amend tax return instructions See the discussion of Payments for jointly-owned home in chapter 18. Amend tax return instructions Redeemable ground rents. Amend tax return instructions   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Amend tax return instructions   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Amend tax return instructions For more information, see Publication 936. Amend tax return instructions Nonredeemable ground rents. Amend tax return instructions   Payments on a nonredeemable ground rent are not mortgage interest. Amend tax return instructions You can deduct them as rent if they are a business expense or if they are for rental property. Amend tax return instructions Reverse mortgages. Amend tax return instructions   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Amend tax return instructions With a reverse mortgage, you retain title to your home. Amend tax return instructions Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Amend tax return instructions Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Amend tax return instructions Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Amend tax return instructions Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Amend tax return instructions Rental payments. Amend tax return instructions   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Amend tax return instructions This is true even if the settlement papers call them interest. Amend tax return instructions You cannot deduct these payments as home mortgage interest. Amend tax return instructions Mortgage proceeds invested in tax-exempt securities. Amend tax return instructions   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Amend tax return instructions “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Amend tax return instructions Refunds of interest. Amend tax return instructions   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Amend tax return instructions If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Amend tax return instructions However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Amend tax return instructions This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Amend tax return instructions    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Amend tax return instructions For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Amend tax return instructions   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Amend tax return instructions Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Amend tax return instructions Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Amend tax return instructions A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Amend tax return instructions See Points paid by the seller , later. Amend tax return instructions General Rule You generally cannot deduct the full amount of points in the year paid. Amend tax return instructions Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Amend tax return instructions See Deduction Allowed Ratably , next. Amend tax return instructions For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Amend tax return instructions Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Amend tax return instructions You use the cash method of accounting. Amend tax return instructions This means you report income in the year you receive it and deduct expenses in the year you pay them. Amend tax return instructions Most individuals use this method. Amend tax return instructions Your loan is secured by a home. Amend tax return instructions (The home does not need to be your main home. Amend tax return instructions ) Your loan period is not more than 30 years. Amend tax return instructions If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Amend tax return instructions Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Amend tax return instructions Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Amend tax return instructions (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Amend tax return instructions ) Your loan is secured by your main home. Amend tax return instructions (Your main home is the one you ordinarily live in most of the time. Amend tax return instructions ) Paying points is an established business practice in the area where the loan was made. Amend tax return instructions The points paid were not more than the points generally charged in that area. Amend tax return instructions You use the cash method of accounting. Amend tax return instructions This means you report income in the year you receive it and deduct expenses in the year you pay them. Amend tax return instructions (If you want more information about this method, see Accounting Methods in chapter 1. Amend tax return instructions ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Amend tax return instructions The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Amend tax return instructions The funds you provided are not required to have been applied to the points. Amend tax return instructions They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Amend tax return instructions You cannot have borrowed these funds from your lender or mortgage broker. Amend tax return instructions You use your loan to buy or build your main home. Amend tax return instructions The points were computed as a percentage of the principal amount of the mortgage. Amend tax return instructions The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Amend tax return instructions The points may be shown as paid from either your funds or the seller's. Amend tax return instructions Figure 23-B. Amend tax return instructions Are My Points Fully Deductible This Year? Please click here for the text description of the image. Amend tax return instructions Figure 23-B. Amend tax return instructions Are My Points Fully Deductible This Year? Note. Amend tax return instructions If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Amend tax return instructions Home improvement loan. Amend tax return instructions   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Amend tax return instructions Second home. Amend tax return instructions You cannot fully deduct in the year paid points you pay on loans secured by your second home. Amend tax return instructions You can deduct these points only over the life of the loan. Amend tax return instructions Refinancing. Amend tax return instructions   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Amend tax return instructions This is true even if the new mortgage is secured by your main home. Amend tax return instructions   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Amend tax return instructions You can deduct the rest of the points over the life of the loan. Amend tax return instructions Example 1. Amend tax return instructions In 1998, Bill Fields got a mortgage to buy a home. Amend tax return instructions In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Amend tax return instructions The mortgage is secured by his home. Amend tax return instructions To get the new loan, he had to pay three points ($3,000). Amend tax return instructions Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Amend tax return instructions Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Amend tax return instructions The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Amend tax return instructions Bill's first payment on the new loan was due July 1. Amend tax return instructions He made six payments on the loan in 2013 and is a cash basis taxpayer. Amend tax return instructions Bill used the funds from the new mortgage to repay his existing mortgage. Amend tax return instructions Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Amend tax return instructions He cannot deduct all of the points in 2013. Amend tax return instructions He can deduct two points ($2,000) ratably over the life of the loan. Amend tax return instructions He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Amend tax return instructions The other point ($1,000) was a fee for services and is not deductible. Amend tax return instructions Example 2. Amend tax return instructions The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Amend tax return instructions Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Amend tax return instructions His deduction is $500 ($2,000 × 25%). Amend tax return instructions Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Amend tax return instructions This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Amend tax return instructions The total amount Bill deducts in 2013 is $550 ($500 + $50). Amend tax return instructions Special Situations This section describes certain special situations that may affect your deduction of points. Amend tax return instructions Original issue discount. Amend tax return instructions   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Amend tax return instructions This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Amend tax return instructions Amounts charged for services. Amend tax return instructions   Amounts charged by the lender for specific services connected to the loan are not interest. Amend tax return instructions Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Amend tax return instructions You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Amend tax return instructions Points paid by the seller. Amend tax return instructions   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Amend tax return instructions Treatment by seller. Amend tax return instructions   The seller cannot deduct these fees as interest. Amend tax return instructions But they are a selling expense that reduces the amount realized by the seller. Amend tax return instructions See chapter 15 for information on selling your home. Amend tax return instructions Treatment by buyer. Amend tax return instructions    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Amend tax return instructions If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Amend tax return instructions If any of those tests are not met, the buyer deducts the points over the life of the loan. Amend tax return instructions   For information about basis, see chapter 13. Amend tax return instructions Funds provided are less than points. Amend tax return instructions   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Amend tax return instructions In addition, you can deduct any points paid by the seller. Amend tax return instructions Example 1. Amend tax return instructions When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Amend tax return instructions You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Amend tax return instructions Of the $1,000 charged for points, you can deduct $750 in the year paid. Amend tax return instructions You spread the remaining $250 over the life of the mortgage. Amend tax return instructions Example 2. Amend tax return instructions The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Amend tax return instructions In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Amend tax return instructions You spread the remaining $250 over the life of the mortgage. Amend tax return instructions You must reduce the basis of your home by the $1,000 paid by the seller. Amend tax return instructions Excess points. Amend tax return instructions   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Amend tax return instructions You must spread any additional points over the life of the mortgage. Amend tax return instructions Mortgage ending early. Amend tax return instructions   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Amend tax return instructions However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Amend tax return instructions Instead, deduct the remaining balance over the term of the new loan. Amend tax return instructions    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Amend tax return instructions Example. Amend tax return instructions Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Amend tax return instructions He deducts $200 points per year. Amend tax return instructions Through 2012, Dan has deducted $2,200 of the points. Amend tax return instructions Dan prepaid his mortgage in full in 2013. Amend tax return instructions He can deduct the remaining $800 of points in 2013. Amend tax return instructions Limits on deduction. Amend tax return instructions   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Amend tax return instructions See Publication 936 for details. Amend tax return instructions Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Amend tax return instructions The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Amend tax return instructions Qualified mortgage insurance. Amend tax return instructions   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Amend tax return instructions   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Amend tax return instructions If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Amend tax return instructions These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Amend tax return instructions Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Amend tax return instructions Special rules for prepaid mortgage insurance. Amend tax return instructions   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Amend tax return instructions You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Amend tax return instructions No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Amend tax return instructions This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Amend tax return instructions See the Example below. Amend tax return instructions Example. Amend tax return instructions Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Amend tax return instructions Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Amend tax return instructions Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Amend tax return instructions Ryan's adjusted gross income (AGI) for 2012 is $76,000. Amend tax return instructions Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Amend tax return instructions For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Amend tax return instructions In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Amend tax return instructions Limit on deduction. Amend tax return instructions   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Amend tax return instructions See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Amend tax return instructions If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Amend tax return instructions Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Amend tax return instructions You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Amend tax return instructions A governmental unit is a person for purposes of furnishing the statement. Amend tax return instructions The statement for each year should be sent to you by January 31 of the following year. Amend tax return instructions A copy of this form will also be sent to the IRS. Amend tax return instructions The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Amend tax return instructions However, it should not show any interest that was paid for you by a government agency. Amend tax return instructions As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Amend tax return instructions However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Amend tax return instructions See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Amend tax return instructions Prepaid interest on Form 1098. Amend tax return instructions   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Amend tax return instructions However, you cannot deduct the prepaid amount for January 2014 in 2013. Amend tax return instructions (See Prepaid interest , earlier. Amend tax return instructions ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Amend tax return instructions You will include the interest for January 2014 with the other interest you pay for 2014. Amend tax return instructions See How To Report , later. Amend tax return instructions Refunded interest. Amend tax return instructions   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Amend tax return instructions See Refunds of interest , earlier. Amend tax return instructions Mortgage insurance premiums. Amend tax return instructions   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Amend tax return instructions See Mortgage Insurance Premiums, earlier. Amend tax return instructions Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Amend tax return instructions If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Amend tax return instructions You can deduct investment interest subject to the limit discussed later. Amend tax return instructions However, you cannot deduct interest you incurred to produce tax-exempt income. Amend tax return instructions Nor can you deduct interest expenses on straddles. Amend tax return instructions Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Amend tax return instructions Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Amend tax return instructions It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Amend tax return instructions Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Amend tax return instructions Partners, shareholders, and beneficiaries. Amend tax return instructions   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Amend tax return instructions Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Amend tax return instructions Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Amend tax return instructions The allocation is not affected by the use of property that secures the debt. Amend tax return instructions Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Amend tax return instructions You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Amend tax return instructions The interest carried over is treated as investment interest paid or accrued in that next year. Amend tax return instructions You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Amend tax return instructions Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Amend tax return instructions Investment income. Amend tax return instructions    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Amend tax return instructions Investment income does not include Alaska Permanent Fund dividends. Amend tax return instructions It also does not include qualified dividends or net capital gain unless you choose to include them. Amend tax return instructions Choosing to include qualified dividends. Amend tax return instructions   Investment income generally does not include qualified dividends, discussed in chapter 8. Amend tax return instructions However, you can choose to include all or part of your qualified dividends in investment income. Amend tax return instructions   You make this choice by completing Form 4952, line 4g, according to its instructions. Amend tax return instructions   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Amend tax return instructions Choosing to include net capital gain. Amend tax return instructions   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Amend tax return instructions However, you can choose to include all or part of your net capital gain in investment income. Amend tax return instructions    You make this choice by completing Form 4952, line 4g, according to its instructions. Amend tax return instructions   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Amend tax return instructions    Before making either choice, consider the overall effect on your tax liability. Amend tax return instructions Compare your tax if you make one or both of these choices with your tax if you do not. Amend tax return instructions Investment income of child reported on parent's return. Amend tax return instructions    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Amend tax return instructions If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Amend tax return instructions Child's qualified dividends. Amend tax return instructions   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Amend tax return instructions However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Amend tax return instructions   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Amend tax return instructions Child's Alaska Permanent Fund dividends. Amend tax return instructions   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Amend tax return instructions To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Amend tax return instructions Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Amend tax return instructions Subtract the result from the amount on Form 8814, line 12. Amend tax return instructions Child's capital gain distributions. Amend tax return instructions    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Amend tax return instructions However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Amend tax return instructions   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Amend tax return instructions Investment expenses. Amend tax return instructions   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Amend tax return instructions Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Amend tax return instructions Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Amend tax return instructions Losses from passive activities. Amend tax return instructions   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Amend tax return instructions See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Amend tax return instructions Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Amend tax return instructions Exception to use of Form 4952. Amend tax return instructions   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Amend tax return instructions Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Amend tax return instructions You do not have any other deductible investment expenses. Amend tax return instructions You have no carryover of investment interest expense from 2012. Amend tax return instructions If you meet all of these tests, you can deduct all of your investment interest. Amend tax return instructions More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Amend tax return instructions Items You Cannot Deduct Some interest payments are not deductible. Amend tax return instructions Certain expenses similar to interest also are not deductible. Amend tax return instructions Nondeductible expenses include the following items. Amend tax return instructions Personal interest (discussed later). Amend tax return instructions Service charges (however, see Other Expenses (Line 23) in chapter 28). Amend tax return instructions Annual fees for credit cards. Amend tax return instructions Loan fees. Amend tax return instructions Credit investigation fees. Amend tax return instructions Interest to purchase or carry tax-exempt securities. Amend tax return instructions Penalties. Amend tax return instructions   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Amend tax return instructions Personal Interest Personal interest is not deductible. Amend tax return instructions Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Amend tax return instructions It includes the following items. Amend tax return instructions Interest on car loans (unless you use the car for business). Amend tax return instructions Interest on federal, state, or local income tax. Amend tax return instructions Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Amend tax return instructions Late payment charges by a public utility. Amend tax return instructions You may be able to deduct interest you pay on a qualified student loan. Amend tax return instructions For details, see Publication 970, Tax Benefits for Education. Amend tax return instructions Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Amend tax return instructions However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Amend tax return instructions You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Amend tax return instructions You do this by tracing disbursements of the debt proceeds to specific uses. Amend tax return instructions For details on how to do this, see chapter 4 of Publication 535. Amend tax return instructions How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Amend tax return instructions Where you deduct your interest expense generally depends on how you use the loan proceeds. Amend tax return instructions See Table 23-1 for a summary of where to deduct your interest expense. Amend tax return instructions Home mortgage interest and points. Amend tax return instructions   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Amend tax return instructions If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Amend tax return instructions Attach a statement explaining the difference and print “See attached” next to line 10. Amend tax return instructions    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Amend tax return instructions If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Amend tax return instructions The seller must give you this number and you must give the seller your TIN. Amend tax return instructions A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Amend tax return instructions Failure to meet any of these requirements may result in a $50 penalty for each failure. Amend tax return instructions The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Amend tax return instructions See Social Security Number (SSN) in chapter 1 for more information about TINs. Amend tax return instructions    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Amend tax return instructions   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Amend tax return instructions More than one borrower. Amend tax return instructions   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Amend tax return instructions Show how much of the interest each of you paid, and give the name and address of the person who received the form. Amend tax return instructions Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Amend tax return instructions Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Amend tax return instructions   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Amend tax return instructions You should let each of the other borrowers know what his or her share is. Amend tax return instructions Mortgage proceeds used for business or investment. Amend tax return instructions    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Amend tax return instructions It shows where to deduct the part of your excess interest that is for those activities. Amend tax return instructions Investment interest. Amend tax return instructions    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Amend tax return instructions Amortization of bond premium. Amend tax return instructions   There are various ways to treat the premium you pay to buy taxable bonds. Amend tax return instructions See Bond Premium Amortization in Publication 550. Amend tax return instructions Income-producing rental or royalty interest. Amend tax return instructions   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Amend tax return instructions Example. Amend tax return instructions You rent out part of your home and borrow money to make repairs. Amend tax return instructions You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Amend tax return instructions Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Amend tax return instructions Table 23-1. Amend tax return instructions Where To Deduct Your Interest Expense IF you have . Amend tax return instructions . Amend tax return instructions . Amend tax return instructions THEN deduct it on . Amend tax return instructions . Amend tax return instructions . Amend tax return instructions AND for more information go to . Amend tax return instructions . Amend tax return instructions . Amend tax return instructions deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Amend tax return instructions deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Amend tax return instructions deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Amend tax return instructions deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Amend tax return instructions deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Amend tax return instructions deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Amend tax return instructions deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Amend tax return instructions deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Amend tax return instructions deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Amend tax return instructions personal interest not deductible. Amend tax return instructions Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 06-Jun-2013

The Amend Tax Return Instructions

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