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H&r Block Free Federal Tax Return

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H&r Block Free Federal Tax Return

H&r block free federal tax return 3. H&r block free federal tax return   Credit for Withholding and Estimated Tax for 2013 Table of Contents Introduction Topics - This chapter discusses: WithholdingForm W-2 Form W-2G The 1099 Series Form Not Correct Form Received After Filing Separate Returns Fiscal Years (FY) Estimated TaxSeparate Returns Divorced Taxpayers Excess Social Security or Railroad Retirement Tax WithholdingJoint returns. H&r block free federal tax return Worksheet for Nonrailroad Employees Worksheets for Railroad Employees Introduction When you file your 2013 income tax return, take credit for all the income tax and excess social security or railroad retirement tax withheld from your salary, wages, pensions, etc. H&r block free federal tax return Also take credit for the estimated tax you paid for 2013. H&r block free federal tax return These credits are subtracted from your total tax. H&r block free federal tax return Because these credits are refundable, you should file a return and claim these credits, even if you do not owe tax. H&r block free federal tax return If the total of your withholding and your estimated tax payments for any payment period is less than the amount you needed to pay by the due date for that period, you may be charged a penalty, even if the total of these credits is more than your tax for the year. H&r block free federal tax return Topics - This chapter discusses: How to take credit for withholding, How to take credit for estimated taxes you paid, and How to take credit for excess social security, Medicare, or railroad retirement tax withholding. H&r block free federal tax return Withholding If you had income tax withheld during 2013, you generally should be sent a statement by January 31, 2014, showing your income and the tax withheld. H&r block free federal tax return Depending on the source of your income, you will receive: Form W-2, Wage and Tax Statement, Form W-2G, Certain Gambling Winnings, or A form in the 1099 series. H&r block free federal tax return Form W-2 Your employer is required to provide or send Form W-2 to you no later than January 31, 2014. H&r block free federal tax return You should receive a separate Form W-2 from each employer you worked for. H&r block free federal tax return If you stopped working before the end of 2013, your employer could have given you your Form W-2 at any time after you stopped working. H&r block free federal tax return However, your employer must provide or send it to you by January 31, 2014. H&r block free federal tax return If you ask for the form, your employer must send it to you within 30 days after receiving your written request or within 30 days after your final wage payment, whichever is later. H&r block free federal tax return If you have not received your Form W-2 by January 31, contact your employer or payer to request a copy. H&r block free federal tax return If you still do not get the form by February 15, the IRS can help you by requesting the form from your employer. H&r block free federal tax return The phone number for the IRS is listed in chapter 5. H&r block free federal tax return You will be asked for the following information. H&r block free federal tax return Your name, address, city and state, zip code, and social security number. H&r block free federal tax return Your employer's name, address, city, state, zip code, and the employer's identification number (if known). H&r block free federal tax return An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. H&r block free federal tax return The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible. H&r block free federal tax return Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. H&r block free federal tax return Total the federal income tax withheld (shown in box 2 of all Forms W-2 received) and enter that amount on the appropriate line of your tax return. H&r block free federal tax return In addition, Form W-2 is used to report any taxable sick pay you received and any income tax withheld from your sick pay. H&r block free federal tax return Your sick pay may be combined with other wages in one Form W-2 or you may receive a separate Form W-2 for sick pay. H&r block free federal tax return If you file a paper tax return, attach Copy B of Form W-2 to your return. H&r block free federal tax return Form W-2G If you had gambling winnings in 2013, the payer may have withheld income tax. H&r block free federal tax return If tax was withheld, the payer will give you a Form W-2G showing the amount you won and the amount of tax withheld. H&r block free federal tax return Report the amounts you won on line 21 of Form 1040. H&r block free federal tax return Take credit for the tax withheld on line 62 of Form 1040. H&r block free federal tax return If you had gambling winnings, you must use Form 1040; you cannot use Form 1040A or Form 1040EZ. H&r block free federal tax return Gambling losses can be deducted on Schedule A (Form 1040) as a miscellaneous itemized deduction. H&r block free federal tax return However, you cannot deduct more than the gambling winnings you report on Form 1040. H&r block free federal tax return File Form W-2G with your income tax return only if it shows any federal income tax withheld in box 2. H&r block free federal tax return The 1099 Series Most forms in the 1099 series are not filed with your return. H&r block free federal tax return In general, these forms should be furnished to you by January 31, 2014. H&r block free federal tax return Unless instructed to file any of these forms with your return, keep them for your records. H&r block free federal tax return There are several different forms in this series, including: Form 1099-B, Proceeds From Broker and Barter Exchange Transactions; Form 1099-C, Cancellation of Debt; Form 1099-DIV, Dividends and Distributions; Form 1099-G, Certain Government Payments; Form 1099-INT, Interest Income; Form 1099-K, Payment Card and Third-Party Network Transactions; Form 1099-MISC, Miscellaneous Income; Form 1099-OID, Original Issue Discount; Form 1099-PATR, Taxable Distributions Received From Cooperatives; Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530); Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. H&r block free federal tax return ; Form SSA-1099, Social Security Benefit Statement; and Form RRB-1099, Payments by the Railroad Retirement Board. H&r block free federal tax return If you received the types of income reported on some forms in the 1099 series, you may not be able to use Form 1040A or Form 1040EZ. H&r block free federal tax return See the instructions to these forms for details. H&r block free federal tax return Reporting your withholding. H&r block free federal tax return   Report on your tax return all federal income tax withholding shown on your Form 1099, Form SSA-1099, and/or Form RRB-1099. H&r block free federal tax return Include the amount withheld in the total on line 62 of Form 1040, line 36 of Form 1040A, or line 7 of Form 1040EZ. H&r block free federal tax return Form 1099-R. H&r block free federal tax return   Attach Form 1099-R to your paper return if federal income tax withholding is shown in box 4. H&r block free federal tax return Do not attach any other Form 1099. H&r block free federal tax return Form Not Correct If you receive a form with incorrect information, you should ask the payer for a corrected form. H&r block free federal tax return Call the telephone number or write to the address given for the payer on the form. H&r block free federal tax return The corrected Form W-2G or Form 1099 you receive will have an “X” in the “CORRECTED” box at the top of the form. H&r block free federal tax return A special form, Form W-2c, Corrected Wage and Tax Statement, is used to correct a Form W-2. H&r block free federal tax return In certain situations, you will receive two forms in place of the original incorrect form. H&r block free federal tax return This will happen when your taxpayer identification number is wrong or missing, your name and address are wrong, or you received the wrong type of form (for example, a Form 1099-DIV instead of a Form 1099-INT). H&r block free federal tax return One new form you receive will be the same incorrect form or have the same incorrect information, but all money amounts will be zero. H&r block free federal tax return This form will have an “X” in the “CORRECTED” box at the top of the form. H&r block free federal tax return The second new form should have all the correct information, prepared as though it is the original (the “CORRECTED” box will not be checked). H&r block free federal tax return Form Received After Filing If you file your return and you later receive a form for income that you did not include on your return, report the income and take credit for any income tax withheld by filing Form 1040X, Amended U. H&r block free federal tax return S. H&r block free federal tax return Individual Income Tax Return. H&r block free federal tax return Separate Returns If you are married but file a separate return, you can take credit only for the tax withheld from your own income. H&r block free federal tax return Do not include any amount withheld from your spouse's income. H&r block free federal tax return However, different rules may apply if you live in a community property state. H&r block free federal tax return Community property states. H&r block free federal tax return   The following are community property states. H&r block free federal tax return Arizona. H&r block free federal tax return California. H&r block free federal tax return Idaho. H&r block free federal tax return Louisiana. H&r block free federal tax return Nevada. H&r block free federal tax return New Mexico. H&r block free federal tax return Texas. H&r block free federal tax return Washington. H&r block free federal tax return Wisconsin. H&r block free federal tax return Generally, if you live in a community property state and file a separate return, you and your spouse each must report half of all community income in addition to your own separate income. H&r block free federal tax return If you are required to report half of all community income, you are entitled to take credit for half of all taxes withheld on the community income. H&r block free federal tax return If you were divorced during the year, each of you generally must report half the community income and can take credit for half the withholding on that community income for the period before the divorce. H&r block free federal tax return   For more information on these rules, and some exceptions, see Publication 555, Community Property. H&r block free federal tax return Fiscal Years (FY) If you file your tax return on the basis of a fiscal year (a 12-month period ending on the last day of any month except December), you must follow special rules, described below, to determine your credit for federal income tax withholding. H&r block free federal tax return Fiscal year withholding. H&r block free federal tax return    You can claim credit on your tax return only for the tax withheld during the calendar year (CY) ending within your fiscal year. H&r block free federal tax return You cannot claim credit for any of the tax withheld during the calendar year beginning in your fiscal year. H&r block free federal tax return You will be able to claim credit for that withholding on your return for your next fiscal year. H&r block free federal tax return   The Form W-2 or 1099 you receive for the calendar year that ends during your fiscal year will show the tax withheld and the income you received during that calendar year. H&r block free federal tax return   Although you take credit for all the withheld tax shown on the form, report only the part of the income shown on the form that you received during your fiscal year. H&r block free federal tax return Add to that the income you received during the rest of your fiscal year. H&r block free federal tax return Example. H&r block free federal tax return Miles Hanson files his return for a fiscal year ending June 30, 2013. H&r block free federal tax return In January 2013, he received a Form W-2 that showed that his wages for 2012 were $31,200 and that his income tax withheld was $3,380. H&r block free federal tax return His records show that he had received $15,000 of the wages by June 30, 2012, and $16,200 from July 1 through December 31, 2012. H&r block free federal tax return See Table 3-1 . H&r block free federal tax return On his return for the fiscal year ending June 30, 2013, Miles will report the $16,200 he was paid in July through December of 2012, plus the $18,850 he was paid during the rest of the fiscal year, January 1, 2013, through June 30, 2013. H&r block free federal tax return However, he takes credit for all $3,380 that was withheld during 2012. H&r block free federal tax return On his return for the fiscal year ending June 30, 2012, he reported the $15,000 he was paid in January through June 2012, but took no credit for the tax withheld during that time. H&r block free federal tax return On his return for the fiscal year ending June 30, 2014, he will take the credit for any tax withheld during 2013 but not for any tax withheld during 2014. H&r block free federal tax return Table 3-1. H&r block free federal tax return Example for Fiscal Year Ending June 30, 2013—Miles Hanson Date Form W-2 Miles' records Tax return for FY ending 6/30/20121 Tax return for FY ending 6/30/2013 Wages With- holding Wages With- holding Wages With- holding Wages With- holding CY 20122 $31,200 $3,380             1/1/2012 –  6/30/2012     $15,000 $1,600 $15,000       7/1/2012 –  12/31/2012     $16,200 $1,780     $16,200 $3,380 CY 2013 $37,700 $4,316 3             1/1/2013 –  6/30/2013     $18,850 $2,158     $18,850   7/1/2013 –  12/31/2013     $18,850 4 $2,158         1Miles' tax return for FY ending 6/30/2012 also included his wages for 7/1–12/31/2011 and the withholding shown on his 2011 Form W-2. H&r block free federal tax return  2Calendar year (January 1 – December 31). H&r block free federal tax return   3Withholding shown on 2013 Form W-2 ($4,316) will be included in Miles' tax return for FY ending 6/30/2014, the fiscal year in which calendar year 2013 ends. H&r block free federal tax return   4Wages for 7/1–12/31/2013 ($18,850) will be included in Miles' tax return for FY ending 6/30/2014, the fiscal year in which the wages were received. H&r block free federal tax return Backup withholding. H&r block free federal tax return   If income tax has been withheld under the backup withholding rule, take credit for it on your tax return for the fiscal year in which you received the income. H&r block free federal tax return Example. H&r block free federal tax return Emily Smith's records show that she received income in November 2013 and February 2014 from which there was backup withholding ($100 and $50, respectively). H&r block free federal tax return Emily takes credit for the entire $150 of backup withholding on her tax return for the fiscal year ending September 30, 2014. H&r block free federal tax return Estimated Tax Take credit for all your estimated tax payments for 2013 on line 63 of Form 1040 or line 37 of Form 1040A. H&r block free federal tax return Include any overpayment from 2012 that you had credited to your 2013 estimated tax. H&r block free federal tax return You must use Form 1040 or Form 1040A if you paid estimated tax. H&r block free federal tax return You cannot file Form 1040EZ. H&r block free federal tax return If you were a beneficiary of an estate or trust, you should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. H&r block free federal tax return , from the fiduciary. H&r block free federal tax return If you have estimated taxes credited to you from the estate or trust (from Schedule K-1 (Form 1041)), you must report the estimated taxes on Schedule E (Form 1040). H&r block free federal tax return On the dotted line next to the entry space for line 37 of Schedule E (Form 1040), enter “ES payment claimed” and the amount. H&r block free federal tax return However, do not include this amount in the total on line 37. H&r block free federal tax return Instead, enter the amount on Form 1040, line 63. H&r block free federal tax return This estimated tax payment for 2013 is treated as being made by you on January 15, 2014. H&r block free federal tax return Name changed. H&r block free federal tax return   If you changed your name, and you made estimated tax payments using your former name, attach a statement to the front of your paper tax return indicating: When you made the payments, The amount of each payment, Your name when you made the payments, and The social security number under which you made the payments. H&r block free federal tax return  The statement should cover payments you made jointly with your spouse as well as any you made separately. H&r block free federal tax return   Be sure to report the change to your local Social Security Administration office before filing your 2014 tax return. H&r block free federal tax return This prevents delays in processing your return and issuing refunds. H&r block free federal tax return It also safeguards your future social security benefits. H&r block free federal tax return For more information, call the Social Security Administration at 1-800-772-1213. H&r block free federal tax return Separate Returns If you and your spouse made separate estimated tax payments for 2013 and you file separate returns, you can take credit only for your own payments. H&r block free federal tax return If you made joint estimated tax payments, you must decide how to divide the payments between your returns. H&r block free federal tax return One of you can claim all of the estimated tax paid and the other none, or you can divide it in any other way you agree on. H&r block free federal tax return If you cannot agree, you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for 2013. H&r block free federal tax return Example. H&r block free federal tax return James and Evelyn Brown made joint estimated tax payments for 2013 totaling $3,000. H&r block free federal tax return They file separate 2013 Forms 1040. H&r block free federal tax return James' tax is $4,000 and Evelyn's is $1,000. H&r block free federal tax return If they do not agree on how to divide the $3,000, they must divide it proportionately between their returns. H&r block free federal tax return Because James' tax ($4,000) is 80% of the total tax ($5,000), his share of the estimated tax is $2,400 (80% of $3,000). H&r block free federal tax return The balance, $600 (20% of $3,000), is Evelyn's share. H&r block free federal tax return Divorced Taxpayers If you made joint estimated tax payments for 2013 and you were divorced during the year, either you or your former spouse can claim all of the joint payments, or you each can claim part of them. H&r block free federal tax return If you cannot agree on how to divide the payments, you must divide them in proportion to each spouse's individual tax as shown on your separate returns for 2013. H&r block free federal tax return See Example earlier under Separate Returns. H&r block free federal tax return If you claim any of the joint payments on your tax return, enter your former spouse's social security number (SSN) in the space provided at the top of page 1 of Form 1040 or Form 1040A. H&r block free federal tax return If you divorced and remarried in 2013, enter your present spouse's SSN in that space. H&r block free federal tax return Enter your former spouse's SSN, followed by “DIV,” under Payments to the left of Form 1040, line 63, or in the blank space to the left of Form 1040A, line 37. H&r block free federal tax return Excess Social Security or Railroad Retirement Tax Withholding Most employers must withhold social security tax from your wages. H&r block free federal tax return In some cases, however, the federal government and state and local governments do not have to withhold social security tax from their employees' wages. H&r block free federal tax return If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax. H&r block free federal tax return Two or more employers. H&r block free federal tax return   If you worked for two or more employers in 2013, too much social security tax or tier 1 RRTA tax may have been withheld from your pay. H&r block free federal tax return You may be able to claim the excess as a credit against your income tax when you file your return. H&r block free federal tax return Table 3-2 shows the maximum amount that should have been withheld for any of these taxes for 2013. H&r block free federal tax return Figure the excess withholding on the appropriate worksheet. H&r block free federal tax return    Table 3-2. H&r block free federal tax return Maximum Social Security and RRTA Withholding for 2013 Type of tax Maximum wages subject to tax Tax rate Maximum tax to be withheld Social security $113,700 6. H&r block free federal tax return 2% $7,049. H&r block free federal tax return 40 Tier 1 RRTA $113,700 6. H&r block free federal tax return 2% $7,049. H&r block free federal tax return 40 Tier 2 RRTA $84,300 4. H&r block free federal tax return 4% $3,709. H&r block free federal tax return 20 Joint returns. H&r block free federal tax return   If you are filing a joint return, you and your spouse must figure any excess social security or tier 1 RRTA separately. H&r block free federal tax return Note. H&r block free federal tax return All wages are subject to Medicare tax withholding. H&r block free federal tax return Employer's error. H&r block free federal tax return   If you had only one employer and he or she withheld too much social security, Medicare, or tier 1 RRTA tax, ask the employer to refund the excess amount to you. H&r block free federal tax return If the employer refuses to refund the overcollection, ask for a statement indicating the amount of the overcollection to support your claim. H&r block free federal tax return File a claim for refund using Form 843, Claim for Refund and Request for Abatement. H&r block free federal tax return Worksheet for Nonrailroad Employees If you did not work for a railroad during 2013, figure the excess social security withholding on Worksheet 3-1. H&r block free federal tax return Note. H&r block free federal tax return If you worked for both a railroad employer and a nonrailroad employer, use Worksheet 3-2, to figure excess social security and tier 1 RRTA tax. H&r block free federal tax return Where to claim credit for excess social security withholding. H&r block free federal tax return   If you file Form 1040, enter the excess on line 69. H&r block free federal tax return   If you file Form 1040A, include the excess in the total on line 41. H&r block free federal tax return Write “Excess SST” and show the amount of the credit in the space to the left of the line. H&r block free federal tax return   You cannot claim excess social security tax withholding on Form 1040EZ. H&r block free federal tax return Worksheets for Railroad Employees If you worked for a railroad during 2013, figure your excess withholding on Worksheet 3-2 and 3-3, as appropriate. H&r block free federal tax return Where to claim credit for excess tier 1 RRTA withholding. H&r block free federal tax return   If you file Form 1040, enter the excess on line 69. H&r block free federal tax return   If you file Form 1040A, include the excess in the total on line 41. H&r block free federal tax return Write “Excess SST” and show the amount of the credit in the space to the left of the line. H&r block free federal tax return   You cannot claim excess tier 1 RRTA withholding on Form 1040EZ. H&r block free federal tax return How to claim refund of excess tier 2 RRTA. H&r block free federal tax return   To claim a refund of tier 2 tax, use Form 843. H&r block free federal tax return Be sure to attach a copy of all of your Forms W-2. H&r block free federal tax return   See Worksheet 3-3 and the Instructions for Form 843, for more details. H&r block free federal tax return Worksheet 3-1. H&r block free federal tax return Excess Social Security—Nonrailroad Employees 1. H&r block free federal tax return Add all social security tax withheld (but not more than  $7,049. H&r block free federal tax return 40 for each employer). H&r block free federal tax return This tax should be shown  in box 4 of your Forms W-2. H&r block free federal tax return Enter the total here 1. H&r block free federal tax return   2. H&r block free federal tax return Enter any uncollected social security tax on tips or group-term life insurance on Form 1040, line 60, identified by “UT” 2. H&r block free federal tax return   3. H&r block free federal tax return Add lines 1 and 2. H&r block free federal tax return If $7,049. H&r block free federal tax return 40 or less, stop here. H&r block free federal tax return You cannot claim the credit 3. H&r block free federal tax return   4. H&r block free federal tax return Social security limit 4. H&r block free federal tax return $7,049. H&r block free federal tax return 40 5. H&r block free federal tax return Excess. H&r block free federal tax return Subtract line 4 from line 3 5. H&r block free federal tax return   Worksheet 3-2. H&r block free federal tax return Excess Social Security and Tier 1 RRTA—Railroad Employees 1. H&r block free federal tax return Add all social security and tier 1 RRTA tax withheld (but not more than $7,049. H&r block free federal tax return 40 for each employer). H&r block free federal tax return Social security tax should be shown in box 4 and tier 1 RRTA should be shown  in box 14 of your Forms W-2. H&r block free federal tax return Enter the total here 1. H&r block free federal tax return   2. H&r block free federal tax return Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance on Form 1040, line 60, identified by “UT” 2. H&r block free federal tax return   3. H&r block free federal tax return Add lines 1 and 2. H&r block free federal tax return If $7,049. H&r block free federal tax return 40 or less, stop here. H&r block free federal tax return You cannot claim the credit 3. H&r block free federal tax return   4. H&r block free federal tax return Social security and tier 1 RRTA tax limit 4. H&r block free federal tax return $7,049. H&r block free federal tax return 40 5. H&r block free federal tax return Excess. H&r block free federal tax return Subtract line 4 from line 3 5. H&r block free federal tax return   Worksheet 3-3. H&r block free federal tax return Excess Tier 2 RRTA—Railroad Employees 1. H&r block free federal tax return Add all tier 2 RRTA tax withheld (but not more than $3,709. H&r block free federal tax return 20 for each employer). H&r block free federal tax return Box 14 of your Forms W-2 should show tier 2 RRTA tax. H&r block free federal tax return Enter the total here 1. H&r block free federal tax return   2. H&r block free federal tax return Enter any uncollected tier 2 RRTA tax on tips or group-term life insurance on Form 1040, line 60, identified by “UT” 2. H&r block free federal tax return   3. H&r block free federal tax return Add lines 1 and 2. H&r block free federal tax return If $3,709. H&r block free federal tax return 20 or less, stop here. H&r block free federal tax return You cannot claim the credit. H&r block free federal tax return 3. H&r block free federal tax return   4. H&r block free federal tax return Tier 2 RRTA tax limit 4. H&r block free federal tax return $3,709. H&r block free federal tax return 20 5. H&r block free federal tax return Excess. H&r block free federal tax return Subtract line 4 from line 3. H&r block free federal tax return 5. H&r block free federal tax return   Prev  Up  Next   Home   More Online Publications
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Buy new, seized, and surplus merchandise and real estate from the government. Some items sold online by auction or fixed price. Others available by public auction, sealed bid, or contract with a Realtor.


The H&r Block Free Federal Tax Return

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