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State Tax File

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State Tax File

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

State tax file Publication 600 - Additional Material Table of Contents Please click here for the text description of the image. State tax file Electronic Filing (E-file) Please click here for the text description of the image. State tax file Electronic Filing (e-file) This image is too large to be displayed in the current screen. State tax file Please click the link to view the image. State tax file Electronic Filing (e-file) Please click here for the text description of the image. State tax file Electronic Filing (e-file) Prev  Up     Home   More Online Publications