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Free tax preparation software 27. Free tax preparation software   Tax Benefits for Work-Related Education Table of Contents What's New Introduction Useful Items - You may want to see: Qualifying Work-Related EducationEducation Required by Employer or by Law Education To Maintain or Improve Skills Education To Meet Minimum Requirements Education That Qualifies You for a New Trade or Business What Expenses Can Be DeductedUnclaimed reimbursement. Free tax preparation software Transportation Expenses Travel Expenses No Double Benefit Allowed Reimbursements Deducting Business ExpensesSelf-Employed Persons Employees Performing Artists and Fee-Basis Officials Impairment-Related Work Expenses Recordkeeping What's New Standard mileage rate. Free tax preparation software  Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2013, through December 31, 2013, is 56½ cents per mile. Free tax preparation software For more information, see Transportation Expenses under What Expenses Can Be Deducted. Free tax preparation software Introduction This chapter discusses work-related education expenses that you may be able to deduct as business expenses. Free tax preparation software To claim such a deduction, you must: Itemize your deductions on Schedule A (Form 1040) if you are an employee, File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed, and Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education . Free tax preparation software If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Free tax preparation software Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income. Free tax preparation software See chapter 28. Free tax preparation software If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. Free tax preparation software Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits (see chapter 35). Free tax preparation software You may qualify for these other benefits even if you do not meet the requirements listed earlier. Free tax preparation software Also, keep in mind that your work-related education expenses may qualify you to claim more than one tax benefit. Free tax preparation software Generally, you may claim any number of benefits as long as you use different expenses to figure each one. Free tax preparation software When you figure your taxes, you may want to compare these tax benefits so you can choose the method(s) that give you the lowest tax liability. Free tax preparation software Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 970 Tax Benefits for Education Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Schedule A (Form 1040) Itemized Deductions Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. Free tax preparation software This is education that meets at least one of the following two tests. Free tax preparation software The education is required by your employer or the law to keep your present salary, status, or job. Free tax preparation software The required education must serve a bona fide business purpose of your employer. Free tax preparation software The education maintains or improves skills needed in your present work. Free tax preparation software However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. Free tax preparation software You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree. Free tax preparation software Use Figure 27-A, later, as a quick check to see if your education qualifies. Free tax preparation software Education Required by Employer or by Law Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. Free tax preparation software This additional education is qualifying work-related education if all three of the following requirements are met. Free tax preparation software It is required for you to keep your present salary, status, or job, The requirement serves a bona fide business purpose of your employer, and The education is not part of a program that will qualify you for a new trade or business. Free tax preparation software When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. Free tax preparation software See Education To Maintain or Improve Skills , later. Free tax preparation software Example. Free tax preparation software You are a teacher who has satisfied the minimum requirements for teaching. Free tax preparation software Your employer requires you to take an additional college course each year to keep your teaching job. Free tax preparation software If the courses will not qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education. Free tax preparation software Education To Maintain or Improve Skills If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. Free tax preparation software This could include refresher courses, courses on current developments, and academic or vocational courses. Free tax preparation software Example. Free tax preparation software You repair televisions, radios, and stereo systems for XYZ Store. Free tax preparation software To keep up with the latest changes, you take special courses in radio and stereo service. Free tax preparation software These courses maintain and improve skills required in your work. Free tax preparation software Maintaining skills vs. Free tax preparation software qualifying for new job. Free tax preparation software   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business. Free tax preparation software Education during temporary absence. Free tax preparation software   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Free tax preparation software Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. Free tax preparation software Example. Free tax preparation software You quit your biology research job to become a full-time biology graduate student for one year. Free tax preparation software If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer. Free tax preparation software Education during indefinite absence. Free tax preparation software   If you stop work for more than a year, your absence from your job is considered indefinite. Free tax preparation software Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Free tax preparation software Therefore, it is not qualifying work-related education. Free tax preparation software Education To Meet Minimum Requirements Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Free tax preparation software The minimum educational requirements are determined by: Laws and regulations, Standards of your profession, trade, or business, and Your employer. Free tax preparation software Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. Free tax preparation software This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education. Free tax preparation software You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work. Free tax preparation software Example 1. Free tax preparation software You are a full-time engineering student. Free tax preparation software Although you have not received your degree or certification, you work part-time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Free tax preparation software Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. Free tax preparation software The education is not qualifying work-related education. Free tax preparation software Example 2. Free tax preparation software You are an accountant and you have met the minimum educational requirements of your employer. Free tax preparation software Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. Free tax preparation software These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired. Free tax preparation software Requirements for Teachers States or school districts usually set the minimum educational requirements for teachers. Free tax preparation software The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. Free tax preparation software If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. Free tax preparation software The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. Free tax preparation software You generally will be considered a faculty member when one or more of the following occurs. Free tax preparation software You have tenure. Free tax preparation software Your years of service count toward obtaining tenure. Free tax preparation software You have a vote in faculty decisions. Free tax preparation software Your school makes contributions for you to a retirement plan other than social security or a similar program. Free tax preparation software Example 1. Free tax preparation software The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. Free tax preparation software In addition, to keep the job a teacher must complete a fifth year of training within 10 years from the date of hire. Free tax preparation software If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. Free tax preparation software However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years. Free tax preparation software Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state. Free tax preparation software If you have all the required education except the fifth year, you have met the minimum educational requirements. Free tax preparation software The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business. Free tax preparation software Figure 27-A Does Your Work-Related Education Qualify? Please click here for the text description of the image. Free tax preparation software Figure 27-A. Free tax preparation software Does Your Work-Related Education Qualify?" Example 2. Free tax preparation software Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. Free tax preparation software The additional four education courses can be qualifying work-related education. Free tax preparation software Although you do not have all the required courses, you have already met the minimum educational requirements. Free tax preparation software Example 3. Free tax preparation software Assume the same facts as in Example 1 except that you are hired with only 3 years of college. Free tax preparation software The courses you take that lead to a bachelor's degree (including those in education) are not qualifying work-related education. Free tax preparation software They are needed to meet the minimum educational requirements for employment as a teacher. Free tax preparation software Example 4. Free tax preparation software You have a bachelor's degree and you work as a temporary instructor at a university. Free tax preparation software At the same time, you take graduate courses toward an advanced degree. Free tax preparation software The rules of the university state that you can become a faculty member only if you get a graduate degree. Free tax preparation software Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. Free tax preparation software You have not met the minimum educational requirements to qualify you as a faculty member. Free tax preparation software The graduate courses are not qualifying work-related education. Free tax preparation software Certification in a new state. Free tax preparation software   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. Free tax preparation software This is true even if you must get additional education to be certified in another state. Free tax preparation software Any additional education you need is qualifying work-related education. Free tax preparation software You have already met the minimum requirements for teaching. Free tax preparation software Teaching in another state is not a new trade or business. Free tax preparation software Example. Free tax preparation software You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. Free tax preparation software You move to State B and are promptly hired as a teacher. Free tax preparation software You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. Free tax preparation software These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A. Free tax preparation software Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. Free tax preparation software This is true even if you do not plan to enter that trade or business. Free tax preparation software If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. Free tax preparation software Example 1. Free tax preparation software You are an accountant. Free tax preparation software Your employer requires you to get a law degree at your own expense. Free tax preparation software You register at a law school for the regular curriculum that leads to a law degree. Free tax preparation software Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business. Free tax preparation software Example 2. Free tax preparation software You are a general practitioner of medicine. Free tax preparation software You take a 2-week course to review developments in several specialized fields of medicine. Free tax preparation software The course does not qualify you for a new profession. Free tax preparation software It is qualifying work-related education because it maintains or improves skills required in your present profession. Free tax preparation software Example 3. Free tax preparation software While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. Free tax preparation software The program will lead to qualifying you to practice psychoanalysis. Free tax preparation software The psychoanalytic training does not qualify you for a new profession. Free tax preparation software It is qualifying work-related education because it maintains or improves skills required in your present profession. Free tax preparation software Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying work-related education. Free tax preparation software They are part of a program of study that can qualify you for a new profession. Free tax preparation software Teaching and Related Duties All teaching and related duties are considered the same general kind of work. Free tax preparation software A change in duties in any of the following ways is not considered a change to a new business. Free tax preparation software Elementary school teacher to secondary school teacher. Free tax preparation software Teacher of one subject, such as biology, to teacher of another subject, such as art. Free tax preparation software Classroom teacher to guidance counselor. Free tax preparation software Classroom teacher to school administrator. Free tax preparation software What Expenses Can Be Deducted If your education meets the requirements described earlier under Qualifying Work-Related Education , you can generally deduct your education expenses as business expenses. Free tax preparation software If you are not self-employed, you can deduct business expenses only if you itemize your deductions. Free tax preparation software You cannot deduct expenses related to tax-exempt and excluded income. Free tax preparation software Deductible expenses. Free tax preparation software   The following education expenses can be deducted. Free tax preparation software Tuition, books, supplies, lab fees, and similar items. Free tax preparation software Certain transportation and travel costs. Free tax preparation software Other education expenses, such as costs of research and typing when writing a paper as part of an educational program. Free tax preparation software Nondeductible expenses. Free tax preparation software   You cannot deduct personal or capital expenses. Free tax preparation software For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. Free tax preparation software This amount is a personal expense. Free tax preparation software Unclaimed reimbursement. Free tax preparation software   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to that unclaimed reimbursement. Free tax preparation software Example. Free tax preparation software Your employer agrees to pay your education expenses if you file a voucher showing your expenses. Free tax preparation software You do not file a voucher, and you do not get reimbursed. Free tax preparation software Because you did not file a voucher, you cannot deduct the expenses on your tax return. Free tax preparation software Transportation Expenses If your education qualifies, you can deduct local transportation costs of going directly from work to school. Free tax preparation software If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. Free tax preparation software Temporary basis. Free tax preparation software   You go to school on a temporary basis if either of the following situations applies to you. Free tax preparation software Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less. Free tax preparation software Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free tax preparation software Your attendance is temporary up to the date you determine it will last more than 1 year. Free tax preparation software Note. Free tax preparation software If you are in either situation (1) or (2), your attendance is not temporary if facts and circumstances indicate otherwise. Free tax preparation software Attendance not on a temporary basis. Free tax preparation software   You do not go to school on a temporary basis if either of the following situations apply to you. Free tax preparation software Your attendance at school is realistically expected to last more than 1 year. Free tax preparation software It does not matter how long you actually attend. Free tax preparation software Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free tax preparation software Your attendance is not temporary after the date you determine it will last more than 1 year. Free tax preparation software Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. Free tax preparation software This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days. Free tax preparation software Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Free tax preparation software Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight. Free tax preparation software Example 1. Free tax preparation software You regularly work in a nearby town, and go directly from work to home. Free tax preparation software You also attend school every work night for 3 months to take a course that improves your job skills. Free tax preparation software Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. Free tax preparation software This is true regardless of the distance traveled. Free tax preparation software Example 2. Free tax preparation software Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. Free tax preparation software You can deduct your transportation expenses from your regular work site to school and then home. Free tax preparation software Example 3. Free tax preparation software Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. Free tax preparation software Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school. Free tax preparation software Example 4. Free tax preparation software Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. Free tax preparation software Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. Free tax preparation software If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. Free tax preparation software If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school. Free tax preparation software Using your car. Free tax preparation software   If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. Free tax preparation software The standard mileage rate for miles driven from January 1, 2013, through December 31, 2013 is 56½ cents per mile. Free tax preparation software Whichever method you use, you can also deduct parking fees and tolls. Free tax preparation software See chapter 26 for information on deducting your actual expenses of using a car. Free tax preparation software Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education. Free tax preparation software Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. Free tax preparation software For more information, see chapter 26. Free tax preparation software You cannot deduct expenses for personal activities, such as sightseeing, visiting, or entertaining. Free tax preparation software Mainly personal travel. Free tax preparation software   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. Free tax preparation software You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities. Free tax preparation software   Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. Free tax preparation software An important factor is the comparison of time spent on personal activities with time spent on educational activities. Free tax preparation software If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location. Free tax preparation software Example 1. Free tax preparation software John works in Newark, New Jersey. Free tax preparation software He traveled to Chicago to take a deductible 1-week course at the request of his employer. Free tax preparation software His main reason for going to Chicago was to take the course. Free tax preparation software While there, he took a sight-seeing trip, entertained some friends, and took a side trip to Pleasantville for a day. Free tax preparation software Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. Free tax preparation software He cannot deduct his transportation expenses of going to Pleasantville. Free tax preparation software He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities. Free tax preparation software Example 2. Free tax preparation software Sue works in Boston. Free tax preparation software She went to a university in Michigan to take a course for work. Free tax preparation software The course is qualifying work-related education. Free tax preparation software She took one course, which is one-fourth of a full course load of study. Free tax preparation software She spent the rest of the time on personal activities. Free tax preparation software Her reasons for taking the course in Michigan were all personal. Free tax preparation software Sue's trip is mainly personal because three-fourths of her time is considered personal time. Free tax preparation software She cannot deduct the cost of her round-trip train ticket to Michigan. Free tax preparation software She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university. Free tax preparation software Example 3. Free tax preparation software Dave works in Nashville and recently traveled to California to take a 2-week seminar. Free tax preparation software The seminar is qualifying work-related education. Free tax preparation software While there, he spent an extra 8 weeks on personal activities. Free tax preparation software The facts, including the extra 8-week stay, show that his main purpose was to take a vacation. Free tax preparation software Dave cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. Free tax preparation software He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. Free tax preparation software Cruises and conventions. Free tax preparation software   Certain cruises and conventions offer seminars or courses as part of their itinerary. Free tax preparation software Even if the seminars or courses are work-related, your deduction for travel may be limited. Free tax preparation software This applies to: Travel by ocean liner, cruise ship, or other form of luxury water transportation, and Conventions outside the North American area. Free tax preparation software   For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Publication 463. Free tax preparation software 50% limit on meals. Free tax preparation software   You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. Free tax preparation software You cannot have been reimbursed for the meals. Free tax preparation software   Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit. Free tax preparation software Travel as Education You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business. Free tax preparation software Example. Free tax preparation software You are a French language teacher. Free tax preparation software While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. Free tax preparation software You chose your itinerary and most of your activities to improve your French language skills. Free tax preparation software You cannot deduct your travel expenses as education expenses. Free tax preparation software This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities. Free tax preparation software No Double Benefit Allowed You cannot do either of the following. Free tax preparation software Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law, for example, the tuition and fees deduction (see chapter 35). Free tax preparation software Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. Free tax preparation software See Adjustments to Qualifying Work-Related Education Expenses , next. Free tax preparation software Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. Free tax preparation software You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. Free tax preparation software For more information, see chapter 12 of Publication 970. Free tax preparation software Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see chapter 1 of Publication 970), The tax-free part of Pell grants (see chapter 1 of Publication 970), The tax-free part of employer-provided educational assistance (see chapter 11 of Publication 970), Veterans' educational assistance (see chapter 1 of Publication 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received for education assistance. Free tax preparation software Amounts that do not reduce qualifying work-related education expenses. Free tax preparation software   Do not reduce the qualifying work-related education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free tax preparation software   Also, do not reduce the qualifying work-related education expenses by any scholarship or fellowship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualifying work-related education expenses. Free tax preparation software Reimbursements How you treat reimbursements depends on the arrangement you have with your employer. Free tax preparation software There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. Free tax preparation software You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2. Free tax preparation software For information on how to treat reimbursements under both accountable and nonaccountable plans, see Reimbursements in chapter 26. Free tax preparation software Deducting Business Expenses Self-employed persons and employees report business expenses differently. Free tax preparation software The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense. Free tax preparation software Self-Employed Persons If you are self-employed, report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally Schedule C, C-EZ, or F). Free tax preparation software If your educational expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. Free tax preparation software See the instructions for the form you file for information on how to complete it. Free tax preparation software Employees If you are an employee, you can deduct the cost of qualifying work-related education only if you: Did not receive (and were not entitled to receive) any reimbursement from your employer, Were reimbursed under a nonaccountable plan (amount is included in box 1 of Form W-2), or Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement. Free tax preparation software If either (1) or (2) applies, you can deduct the total qualifying cost. Free tax preparation software If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement. Free tax preparation software In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21. Free tax preparation software (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Free tax preparation software ) This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. Free tax preparation software See chapter 28. Free tax preparation software Form 2106 or 2106-EZ. Free tax preparation software   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or Form 2106-EZ. Free tax preparation software Form not required. Free tax preparation software   Do not complete either Form 2106 or Form 2106-EZ if: If amounts included in box 1 of your Form W-2, are not considered reimbursements, and You are not claiming travel, transportation, meal, or entertainment expenses. Free tax preparation software   If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21. Free tax preparation software (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Free tax preparation software ) Using Form 2106-EZ. Free tax preparation software   This form is shorter and easier to use than Form 2106. Free tax preparation software Generally, you can use this form if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are using the standard mileage rate if you are claiming vehicle expenses. Free tax preparation software   If you do not meet both of these requirements, use Form 2106. Free tax preparation software Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction. Free tax preparation software Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24. Free tax preparation software You do not have to itemize your deductions on Schedule A (Form 1040), and, therefore, the deduction is not subject to the 2%-of-adjusted-gross-income limit. Free tax preparation software You must complete Form 2106 or 2106-EZ to figure your deduction, even if you meet the requirements described earlier under Form not required . Free tax preparation software For more information on qualified performing artists, see chapter 6 of Publication 463. Free tax preparation software Impairment-Related Work Expenses If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28. Free tax preparation software They are not subject to the 2%-of-adjusted-gross-income limit. Free tax preparation software To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required . Free tax preparation software For more information on impairment-related work expenses, see chapter 6 of Publication 463. Free tax preparation software Recordkeeping You must keep records as proof of any deduction claimed on your tax return. Free tax preparation software Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction. Free tax preparation software For specific information about keeping records of business expenses, see Recordkeeping in chapter 26. Free tax preparation software Prev  Up  Next   Home   More Online Publications
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The Free Tax Preparation Software

Free tax preparation software 9. Free tax preparation software   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Free tax preparation software Depletion unit. Free tax preparation software Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Free tax preparation software The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Free tax preparation software There are two ways of figuring depletion: cost depletion and percentage depletion. Free tax preparation software For mineral property, you generally must use the method that gives you the larger deduction. Free tax preparation software For standing timber, you must use cost depletion. Free tax preparation software Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Free tax preparation software More than one person can have an economic interest in the same mineral deposit or timber. Free tax preparation software In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Free tax preparation software You have an economic interest if both the following apply. Free tax preparation software You have acquired by investment any interest in mineral deposits or standing timber. Free tax preparation software You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Free tax preparation software A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Free tax preparation software A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Free tax preparation software Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Free tax preparation software Basis adjustment for depletion. Free tax preparation software   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Free tax preparation software Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Free tax preparation software For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Free tax preparation software You can treat two or more separate interests as one property or as separate properties. Free tax preparation software See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Free tax preparation software There are two ways of figuring depletion on mineral property. Free tax preparation software Cost depletion. Free tax preparation software Percentage depletion. Free tax preparation software Generally, you must use the method that gives you the larger deduction. Free tax preparation software However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Free tax preparation software See Oil and Gas Wells , later. Free tax preparation software Cost Depletion To figure cost depletion you must first determine the following. Free tax preparation software The property's basis for depletion. Free tax preparation software The total recoverable units of mineral in the property's natural deposit. Free tax preparation software The number of units of mineral sold during the tax year. Free tax preparation software Basis for depletion. Free tax preparation software   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Free tax preparation software Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Free tax preparation software The residual value of land and improvements at the end of operations. Free tax preparation software The cost or value of land acquired for purposes other than mineral production. Free tax preparation software Adjusted basis. Free tax preparation software   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Free tax preparation software Your adjusted basis can never be less than zero. Free tax preparation software See Publication 551, Basis of Assets, for more information on adjusted basis. Free tax preparation software Total recoverable units. Free tax preparation software   The total recoverable units is the sum of the following. Free tax preparation software The number of units of mineral remaining at the end of the year (including units recovered but not sold). Free tax preparation software The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Free tax preparation software   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Free tax preparation software You must include ores and minerals that are developed, in sight, blocked out, or assured. Free tax preparation software You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Free tax preparation software But see Elective safe harbor for owners of oil and gas property , later. Free tax preparation software Number of units sold. Free tax preparation software   You determine the number of units sold during the tax year based on your method of accounting. Free tax preparation software Use the following table to make this determination. Free tax preparation software    IF you  use . Free tax preparation software . Free tax preparation software . Free tax preparation software THEN the units sold during the year are . Free tax preparation software . Free tax preparation software . Free tax preparation software The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Free tax preparation software An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Free tax preparation software   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Free tax preparation software Figuring the cost depletion deduction. Free tax preparation software   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Free tax preparation software Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Free tax preparation software Rate per unit. Free tax preparation software 2 Multiply the rate per unit by units sold during the tax year. Free tax preparation software Cost depletion deduction. Free tax preparation software You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Free tax preparation software Elective safe harbor for owners of oil and gas property. Free tax preparation software   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Free tax preparation software If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Free tax preparation software For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Free tax preparation software irs. Free tax preparation software gov/pub/irs-irbs/irb04-10. Free tax preparation software pdf. Free tax preparation software   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Free tax preparation software The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Free tax preparation software The election, if made, is effective for the tax year in which it is made and all later years. Free tax preparation software It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Free tax preparation software Once revoked, it cannot be re-elected for the next 5 years. Free tax preparation software Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Free tax preparation software The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Free tax preparation software Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Free tax preparation software Gross income. Free tax preparation software   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Free tax preparation software Any rents or royalties you paid or incurred for the property. Free tax preparation software The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Free tax preparation software A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Free tax preparation software   Use the following fraction to figure the part of the bonus you must subtract. Free tax preparation software No. Free tax preparation software of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Free tax preparation software For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Free tax preparation software Taxable income limit. Free tax preparation software   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Free tax preparation software   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Free tax preparation software These deductible items include, but are not limited to, the following. Free tax preparation software Operating expenses. Free tax preparation software Certain selling expenses. Free tax preparation software Administrative and financial overhead. Free tax preparation software Depreciation. Free tax preparation software Intangible drilling and development costs. Free tax preparation software Exploration and development expenditures. Free tax preparation software Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Free tax preparation software Losses sustained. Free tax preparation software   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Free tax preparation software Do not deduct any net operating loss deduction from the gross income from the property. Free tax preparation software Corporations do not deduct charitable contributions from the gross income from the property. Free tax preparation software If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Free tax preparation software See section 1. Free tax preparation software 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Free tax preparation software Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Free tax preparation software You are either an independent producer or a royalty owner. Free tax preparation software The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Free tax preparation software If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Free tax preparation software For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Free tax preparation software Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Free tax preparation software However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Free tax preparation software For information on figuring the deduction, see Figuring percentage depletion , later. Free tax preparation software Refiners who cannot claim percentage depletion. Free tax preparation software   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Free tax preparation software The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Free tax preparation software Related person. Free tax preparation software   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Free tax preparation software For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Free tax preparation software A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Free tax preparation software For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Free tax preparation software The value of the outstanding stock of a corporation. Free tax preparation software The interest in the profits or capital of a partnership. Free tax preparation software The beneficial interests in an estate or trust. Free tax preparation software Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Free tax preparation software Retailers who cannot claim percentage depletion. Free tax preparation software   You cannot claim percentage depletion if both the following apply. Free tax preparation software You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Free tax preparation software Through a retail outlet operated by you or a related person. Free tax preparation software To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Free tax preparation software To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Free tax preparation software The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Free tax preparation software   For the purpose of determining if this rule applies, do not count the following. Free tax preparation software Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Free tax preparation software Bulk sales of aviation fuels to the Department of Defense. Free tax preparation software Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Free tax preparation software Related person. Free tax preparation software   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Free tax preparation software Sales through a related person. Free tax preparation software   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Free tax preparation software   You are not considered to be selling through a related person who is a retailer if all the following apply. Free tax preparation software You do not have a significant ownership interest in the retailer. Free tax preparation software You sell your production to persons who are not related to either you or the retailer. Free tax preparation software The retailer does not buy oil or natural gas from your customers or persons related to your customers. Free tax preparation software There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Free tax preparation software Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Free tax preparation software Transferees who cannot claim percentage depletion. Free tax preparation software   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Free tax preparation software For a definition of the term “transfer,” see section 1. Free tax preparation software 613A-7(n) of the regulations. Free tax preparation software For a definition of the term “interest in proven oil or gas property,” see section 1. Free tax preparation software 613A-7(p) of the regulations. Free tax preparation software Figuring percentage depletion. Free tax preparation software   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Free tax preparation software If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Free tax preparation software If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Free tax preparation software   In addition, there is a limit on the percentage depletion deduction. Free tax preparation software See Taxable income limit , later. Free tax preparation software Average daily production. Free tax preparation software   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Free tax preparation software Partial interest. Free tax preparation software   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Free tax preparation software   You have a partial interest in the production from a property if you have a net profits interest in the property. Free tax preparation software To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Free tax preparation software To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Free tax preparation software Then multiply the total production from the property by your percentage participation to figure your share of the production. Free tax preparation software Example. Free tax preparation software Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Free tax preparation software During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Free tax preparation software Javier had expenses of $90,000 attributable to the property. Free tax preparation software The property generated a net profit of $110,000 ($200,000 − $90,000). Free tax preparation software Pablo received income of $22,000 ($110,000 × . Free tax preparation software 20) for his net profits interest. Free tax preparation software Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Free tax preparation software Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Free tax preparation software Depletable oil or natural gas quantity. Free tax preparation software   Generally, your depletable oil quantity is 1,000 barrels. Free tax preparation software Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Free tax preparation software If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Free tax preparation software Example. Free tax preparation software You have both oil and natural gas production. Free tax preparation software To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Free tax preparation software Your depletable natural gas quantity is 2. Free tax preparation software 16 million cubic feet of gas (360 × 6000). Free tax preparation software You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Free tax preparation software If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Free tax preparation software Also, see Notice 2012-50, available at www. Free tax preparation software irs. Free tax preparation software gov/irb/2012–31_IRB/index. Free tax preparation software html. Free tax preparation software Business entities and family members. Free tax preparation software   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Free tax preparation software Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Free tax preparation software You and your spouse and minor children. Free tax preparation software A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Free tax preparation software Controlled group of corporations. Free tax preparation software   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Free tax preparation software They share the depletable quantity. Free tax preparation software A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Free tax preparation software ” Gross income from the property. Free tax preparation software   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Free tax preparation software If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Free tax preparation software   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Free tax preparation software   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Free tax preparation software Average daily production exceeds depletable quantities. Free tax preparation software   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Free tax preparation software Figure your average daily production of oil or natural gas for the year. Free tax preparation software Figure your depletable oil or natural gas quantity for the year. Free tax preparation software Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Free tax preparation software Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Free tax preparation software This is your depletion allowance for that property for the year. Free tax preparation software Taxable income limit. Free tax preparation software   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Free tax preparation software 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Free tax preparation software For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Free tax preparation software 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Free tax preparation software You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Free tax preparation software Add it to your depletion allowance (before applying any limits) for the following year. Free tax preparation software Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Free tax preparation software (However, see Electing large partnerships must figure depletion allowance , later. Free tax preparation software ) Each partner or shareholder must decide whether to use cost or percentage depletion. Free tax preparation software If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Free tax preparation software Partner's or shareholder's adjusted basis. Free tax preparation software   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Free tax preparation software The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Free tax preparation software   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Free tax preparation software However, in some cases, it is figured according to the partner's interest in partnership income. Free tax preparation software   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Free tax preparation software Recordkeeping. Free tax preparation software Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Free tax preparation software The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Free tax preparation software The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Free tax preparation software Reporting the deduction. Free tax preparation software   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Free tax preparation software Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Free tax preparation software The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Free tax preparation software The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Free tax preparation software Form 6198, At-Risk Limitations. Free tax preparation software Form 8582, Passive Activity Loss Limitations. Free tax preparation software Electing large partnerships must figure depletion allowance. Free tax preparation software   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Free tax preparation software The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Free tax preparation software Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Free tax preparation software   An electing large partnership is one that meets both the following requirements. Free tax preparation software The partnership had 100 or more partners in the preceding year. Free tax preparation software The partnership chooses to be an electing large partnership. Free tax preparation software Disqualified persons. Free tax preparation software   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Free tax preparation software Disqualified persons must figure it themselves, as explained earlier. Free tax preparation software   All the following are disqualified persons. Free tax preparation software Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Free tax preparation software Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Free tax preparation software Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Free tax preparation software Average daily production is discussed earlier. Free tax preparation software Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Free tax preparation software Natural gas sold under a fixed contract. Free tax preparation software   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Free tax preparation software This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Free tax preparation software The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Free tax preparation software Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Free tax preparation software Natural gas from geopressured brine. Free tax preparation software   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Free tax preparation software This is natural gas that is both the following. Free tax preparation software Produced from a well you began to drill after September 1978 and before 1984. Free tax preparation software Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Free tax preparation software Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Free tax preparation software Mines and other natural deposits. Free tax preparation software   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Free tax preparation software   The following is a list of the percentage depletion rates for the more common minerals. Free tax preparation software DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Free tax preparation software Corporate deduction for iron ore and coal. Free tax preparation software   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Free tax preparation software Gross income from the property. Free tax preparation software   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Free tax preparation software Mining includes all the following. Free tax preparation software Extracting ores or minerals from the ground. Free tax preparation software Applying certain treatment processes described later. Free tax preparation software Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Free tax preparation software Excise tax. Free tax preparation software   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Free tax preparation software Extraction. Free tax preparation software   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Free tax preparation software This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Free tax preparation software Treatment processes. Free tax preparation software   The processes included as mining depend on the ore or mineral mined. Free tax preparation software To qualify as mining, the treatment processes must be applied by the mine owner or operator. Free tax preparation software For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Free tax preparation software Transportation of more than 50 miles. Free tax preparation software   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Free tax preparation software    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Free tax preparation software Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Free tax preparation software For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Free tax preparation software irs. Free tax preparation software gov/irb/2013-01_IRB/ar11. Free tax preparation software html. Free tax preparation software Disposal of coal or iron ore. Free tax preparation software   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Free tax preparation software You disposed of it after holding it for more than 1 year. Free tax preparation software You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Free tax preparation software Treat any gain on the disposition as a capital gain. Free tax preparation software Disposal to related person. Free tax preparation software   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Free tax preparation software A related person (as listed in chapter 2 of Publication 544). Free tax preparation software A person owned or controlled by the same interests that own or control you. Free tax preparation software Geothermal deposits. Free tax preparation software   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Free tax preparation software A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Free tax preparation software For percentage depletion purposes, a geothermal deposit is not considered a gas well. Free tax preparation software   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Free tax preparation software See Gross income from the property , earlier, under Oil and Gas Wells. Free tax preparation software Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Free tax preparation software Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Free tax preparation software A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Free tax preparation software Bonuses and advanced royalties. Free tax preparation software   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Free tax preparation software If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Free tax preparation software Figuring cost depletion. Free tax preparation software   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Free tax preparation software To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Free tax preparation software Figuring percentage depletion. Free tax preparation software   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Free tax preparation software Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Free tax preparation software However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Free tax preparation software Ending the lease. Free tax preparation software   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Free tax preparation software Do this for the year the lease ends or is abandoned. Free tax preparation software Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Free tax preparation software   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Free tax preparation software Include this amount in income for the year the lease ends. Free tax preparation software Increase your adjusted basis in the property by the amount you include in income. Free tax preparation software Delay rentals. Free tax preparation software   These are payments for deferring development of the property. Free tax preparation software Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Free tax preparation software These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Free tax preparation software Timber You can figure timber depletion only by the cost method. Free tax preparation software Percentage depletion does not apply to timber. Free tax preparation software Base your depletion on your cost or other basis in the timber. Free tax preparation software Your cost does not include the cost of land or any amounts recoverable through depreciation. Free tax preparation software Depletion takes place when you cut standing timber. Free tax preparation software You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Free tax preparation software Figuring cost depletion. Free tax preparation software   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Free tax preparation software Timber units. Free tax preparation software   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Free tax preparation software You measure the timber using board feet, log scale, cords, or other units. Free tax preparation software If you later determine that you have more or less units of timber, you must adjust the original estimate. Free tax preparation software   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Free tax preparation software Depletion unit. Free tax preparation software   You figure your depletion unit each year by taking the following steps. Free tax preparation software Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Free tax preparation software Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Free tax preparation software Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Free tax preparation software Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Free tax preparation software Divide the result of (2) by the result of (3). Free tax preparation software This is your depletion unit. Free tax preparation software Example. Free tax preparation software You bought a timber tract for $160,000 and the land was worth as much as the timber. Free tax preparation software Your basis for the timber is $80,000. Free tax preparation software Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Free tax preparation software If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Free tax preparation software When to claim depletion. Free tax preparation software   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Free tax preparation software Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Free tax preparation software The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Free tax preparation software Example. Free tax preparation software The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Free tax preparation software You would deduct $20,000 of the $40,000 depletion that year. Free tax preparation software You would add the remaining $20,000 depletion to your closing inventory of timber products. Free tax preparation software Electing to treat the cutting of timber as a sale or exchange. Free tax preparation software   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Free tax preparation software You must make the election on your income tax return for the tax year to which it applies. Free tax preparation software If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Free tax preparation software You generally report the gain as long-term capital gain. Free tax preparation software The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Free tax preparation software For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Free tax preparation software   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Free tax preparation software The prior election (and revocation) is disregarded for purposes of making a subsequent election. Free tax preparation software See Form T (Timber), Forest Activities Schedule, for more information. Free tax preparation software Form T. Free tax preparation software   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. Free tax preparation software Prev  Up  Next   Home   More Online Publications