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Taxcut com 7. Taxcut com   Excess Contributions Table of Contents How Do I Know If I Have Excess Contributions? What Happens If I Have Excess Contributions?Excess Annual Addition Excess Elective Deferral If your actual contributions are greater than your MAC, you have an excess contribution. Taxcut com Excess contributions can result in income tax, additional taxes, and penalties. Taxcut com The effect of excess contributions depends on the type of excess contribution. Taxcut com This chapter discusses excess contributions to your 403(b) account. Taxcut com How Do I Know If I Have Excess Contributions? At the end of the year or the beginning of the next year, you should refigure your MAC based on your actual compensation and actual contributions made to your account. Taxcut com If the actual contributions to your account are greater than your MAC, you have excess contributions. Taxcut com If, at any time during the year, your employment status or your compensation changes, you should refigure your MAC using a revised estimate of compensation to prevent excess contributions. Taxcut com What Happens If I Have Excess Contributions? Certain excess contributions in a 403(b) account can be corrected. Taxcut com The effect of an excess 403(b) contribution will depend on the type of excess contribution. Taxcut com Types of excess contributions. Taxcut com   If, after checking your actual contributions, you determine that you have an excess, the first thing is to identify the type of excess that you have. Taxcut com Excess contributions to a 403(b) account are categorized as either an: Excess annual addition, or Excess elective deferral. Taxcut com Excess Annual Addition An excess annual addition is a contribution that is more than your limit on annual additions. Taxcut com To determine your limit on annual additions, see chapter 3 (chapter 5 for ministers or church employees). Taxcut com In the year that your contributions are more than your limit on annual additions, the excess amount will be included in your income. Taxcut com Excise Tax If your 403(b) account invests in mutual funds, and you exceed your limit on annual additions, you may be subject to a 6% excise tax on the excess contribution. Taxcut com The excise tax does not apply to funds in an annuity account or to excess deferrals. Taxcut com You must pay the excise tax each year in which there are excess contributions in your account. Taxcut com Excess contributions can be corrected by contributing less than the applicable limit in later years or by making permissible distributions. Taxcut com See chapter 8 for a discussion on permissible distributions. Taxcut com You cannot deduct the excise tax. Taxcut com Reporting requirement. Taxcut com   You must file Form 5330 if there has been an excess contribution to a custodial account and that excess has not been corrected. Taxcut com Excess Elective Deferral An excess elective deferral is the amount that is more than your limit on elective deferrals. Taxcut com To determine your limit on elective deferrals, see chapter 4. Taxcut com Your employer's 403(b) plan may contain language permitting it to distribute excess deferrals. Taxcut com If so, it may require that in order to get a distribution of excess deferrals, you either notify the plan of the amount of excess deferrals or designate a distribution as an excess deferral. Taxcut com The plan may require that the notification or designation be in writing and may require that you certify or otherwise establish that the designated amount is an excess deferral. Taxcut com A plan is not required to permit distribution of excess deferrals. Taxcut com Correction of excess deferrals during year. Taxcut com   If you have excess deferrals for a year, a corrective distribution may be made only if both of the following conditions are satisfied. Taxcut com The plan and either you or your employer designate the distribution as an excess deferral to the extent you have excess deferrals for the year. Taxcut com The correcting distribution is made after the date on which the excess deferral was made. Taxcut com Correction of excess deferrals after the year. Taxcut com   If you have excess deferrals for a year, you may receive a correcting distribution of the excess deferral no later than April 15 of the following year. Taxcut com The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made. Taxcut com Tax treatment of excess deferrals not attributable to Roth contributions. Taxcut com   If the excess deferral is distributed by April 15, it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed. Taxcut com Tax treatment of excess deferrals attributable to Roth contributions. Taxcut com   For these rules, see Regulations section 1. Taxcut com 402(g)-1(e). Taxcut com Prev  Up  Next   Home   More Online Publications
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Taxcut com 9. Taxcut com   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. Taxcut com Depletion unit. Taxcut com Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Taxcut com The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Taxcut com There are two ways of figuring depletion: cost depletion and percentage depletion. Taxcut com For mineral property, you generally must use the method that gives you the larger deduction. Taxcut com For standing timber, you must use cost depletion. Taxcut com 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. Taxcut com More than one person can have an economic interest in the same mineral deposit or timber. Taxcut com In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Taxcut com You have an economic interest if both the following apply. Taxcut com You have acquired by investment any interest in mineral deposits or standing timber. Taxcut com 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. Taxcut com 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. Taxcut com A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Taxcut com Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Taxcut com Basis adjustment for depletion. Taxcut com   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Taxcut com Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Taxcut com For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Taxcut com You can treat two or more separate interests as one property or as separate properties. Taxcut com See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Taxcut com There are two ways of figuring depletion on mineral property. Taxcut com Cost depletion. Taxcut com Percentage depletion. Taxcut com Generally, you must use the method that gives you the larger deduction. Taxcut com However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Taxcut com See Oil and Gas Wells , later. Taxcut com Cost Depletion To figure cost depletion you must first determine the following. Taxcut com The property's basis for depletion. Taxcut com The total recoverable units of mineral in the property's natural deposit. Taxcut com The number of units of mineral sold during the tax year. Taxcut com Basis for depletion. Taxcut com   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Taxcut com Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Taxcut com The residual value of land and improvements at the end of operations. Taxcut com The cost or value of land acquired for purposes other than mineral production. Taxcut com Adjusted basis. Taxcut com   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. Taxcut com Your adjusted basis can never be less than zero. Taxcut com See Publication 551, Basis of Assets, for more information on adjusted basis. Taxcut com Total recoverable units. Taxcut com   The total recoverable units is the sum of the following. Taxcut com The number of units of mineral remaining at the end of the year (including units recovered but not sold). Taxcut com The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Taxcut com   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. Taxcut com You must include ores and minerals that are developed, in sight, blocked out, or assured. Taxcut com You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Taxcut com But see Elective safe harbor for owners of oil and gas property , later. Taxcut com Number of units sold. Taxcut com   You determine the number of units sold during the tax year based on your method of accounting. Taxcut com Use the following table to make this determination. Taxcut com    IF you  use . Taxcut com . Taxcut com . Taxcut com THEN the units sold during the year are . Taxcut com . Taxcut com . Taxcut com The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Taxcut com An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Taxcut com   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Taxcut com Figuring the cost depletion deduction. Taxcut com   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. Taxcut com Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Taxcut com Rate per unit. Taxcut com 2 Multiply the rate per unit by units sold during the tax year. Taxcut com Cost depletion deduction. Taxcut com You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Taxcut com Elective safe harbor for owners of oil and gas property. Taxcut com   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Taxcut com If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Taxcut com For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Taxcut com irs. Taxcut com gov/pub/irs-irbs/irb04-10. Taxcut com pdf. Taxcut com   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. Taxcut com The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Taxcut com The election, if made, is effective for the tax year in which it is made and all later years. Taxcut com It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Taxcut com Once revoked, it cannot be re-elected for the next 5 years. Taxcut com 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. Taxcut com 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 . Taxcut com Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Taxcut com Gross income. Taxcut com   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Taxcut com Any rents or royalties you paid or incurred for the property. Taxcut com 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. Taxcut com A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Taxcut com   Use the following fraction to figure the part of the bonus you must subtract. Taxcut com No. Taxcut com 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. Taxcut com For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Taxcut com Taxable income limit. Taxcut com   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. Taxcut com   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. Taxcut com These deductible items include, but are not limited to, the following. Taxcut com Operating expenses. Taxcut com Certain selling expenses. Taxcut com Administrative and financial overhead. Taxcut com Depreciation. Taxcut com Intangible drilling and development costs. Taxcut com Exploration and development expenditures. Taxcut com Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Taxcut com Losses sustained. Taxcut com   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Taxcut com Do not deduct any net operating loss deduction from the gross income from the property. Taxcut com Corporations do not deduct charitable contributions from the gross income from the property. Taxcut com 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. Taxcut com See section 1. Taxcut com 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Taxcut com Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Taxcut com You are either an independent producer or a royalty owner. Taxcut com The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Taxcut com If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Taxcut com 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. Taxcut com 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. Taxcut com However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Taxcut com For information on figuring the deduction, see Figuring percentage depletion , later. Taxcut com Refiners who cannot claim percentage depletion. Taxcut com   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. Taxcut com 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. Taxcut com Related person. Taxcut com   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. Taxcut com For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Taxcut com A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Taxcut com 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. Taxcut com The value of the outstanding stock of a corporation. Taxcut com The interest in the profits or capital of a partnership. Taxcut com The beneficial interests in an estate or trust. Taxcut com 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. Taxcut com Retailers who cannot claim percentage depletion. Taxcut com   You cannot claim percentage depletion if both the following apply. Taxcut com You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Taxcut com Through a retail outlet operated by you or a related person. Taxcut com 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. Taxcut com 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. Taxcut com 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. Taxcut com   For the purpose of determining if this rule applies, do not count the following. Taxcut com Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Taxcut com Bulk sales of aviation fuels to the Department of Defense. Taxcut com 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. Taxcut com Related person. Taxcut com   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Taxcut com Sales through a related person. Taxcut com   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. Taxcut com   You are not considered to be selling through a related person who is a retailer if all the following apply. Taxcut com You do not have a significant ownership interest in the retailer. Taxcut com You sell your production to persons who are not related to either you or the retailer. Taxcut com The retailer does not buy oil or natural gas from your customers or persons related to your customers. Taxcut com 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. Taxcut com 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. Taxcut com Transferees who cannot claim percentage depletion. Taxcut com   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. Taxcut com For a definition of the term “transfer,” see section 1. Taxcut com 613A-7(n) of the regulations. Taxcut com For a definition of the term “interest in proven oil or gas property,” see section 1. Taxcut com 613A-7(p) of the regulations. Taxcut com Figuring percentage depletion. Taxcut com   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. Taxcut com 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%. Taxcut com 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. Taxcut com   In addition, there is a limit on the percentage depletion deduction. Taxcut com See Taxable income limit , later. Taxcut com Average daily production. Taxcut com   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. Taxcut com Partial interest. Taxcut com   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. Taxcut com   You have a partial interest in the production from a property if you have a net profits interest in the property. Taxcut com 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. Taxcut com To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Taxcut com Then multiply the total production from the property by your percentage participation to figure your share of the production. Taxcut com Example. Taxcut com Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Taxcut com During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Taxcut com Javier had expenses of $90,000 attributable to the property. Taxcut com The property generated a net profit of $110,000 ($200,000 − $90,000). Taxcut com Pablo received income of $22,000 ($110,000 × . Taxcut com 20) for his net profits interest. Taxcut com 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). Taxcut com Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Taxcut com Depletable oil or natural gas quantity. Taxcut com   Generally, your depletable oil quantity is 1,000 barrels. Taxcut com 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. Taxcut com 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. Taxcut com Example. Taxcut com You have both oil and natural gas production. Taxcut com To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Taxcut com Your depletable natural gas quantity is 2. Taxcut com 16 million cubic feet of gas (360 × 6000). Taxcut com You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Taxcut com 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. Taxcut com Also, see Notice 2012-50, available at www. Taxcut com irs. Taxcut com gov/irb/2012–31_IRB/index. Taxcut com html. Taxcut com Business entities and family members. Taxcut com   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. Taxcut com 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). Taxcut com You and your spouse and minor children. Taxcut com 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. Taxcut com Controlled group of corporations. Taxcut com   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Taxcut com They share the depletable quantity. Taxcut com 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%. Taxcut com ” Gross income from the property. Taxcut com   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. Taxcut com 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. Taxcut com   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. Taxcut com   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Taxcut com Average daily production exceeds depletable quantities. Taxcut com   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. Taxcut com Figure your average daily production of oil or natural gas for the year. Taxcut com Figure your depletable oil or natural gas quantity for the year. Taxcut com Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Taxcut com 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). Taxcut com This is your depletion allowance for that property for the year. Taxcut com Taxable income limit. Taxcut com   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. Taxcut com 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. Taxcut com For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Taxcut com 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. Taxcut com You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Taxcut com Add it to your depletion allowance (before applying any limits) for the following year. Taxcut com Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Taxcut com (However, see Electing large partnerships must figure depletion allowance , later. Taxcut com ) Each partner or shareholder must decide whether to use cost or percentage depletion. Taxcut com 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. Taxcut com Partner's or shareholder's adjusted basis. Taxcut com   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. Taxcut com The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Taxcut com   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. Taxcut com However, in some cases, it is figured according to the partner's interest in partnership income. Taxcut com   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. Taxcut com Recordkeeping. Taxcut com 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. Taxcut com The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Taxcut com 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. Taxcut com Reporting the deduction. Taxcut com   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). Taxcut com Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Taxcut com The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Taxcut com The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Taxcut com Form 6198, At-Risk Limitations. Taxcut com Form 8582, Passive Activity Loss Limitations. Taxcut com Electing large partnerships must figure depletion allowance. Taxcut com   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Taxcut com 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. Taxcut com Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Taxcut com   An electing large partnership is one that meets both the following requirements. Taxcut com The partnership had 100 or more partners in the preceding year. Taxcut com The partnership chooses to be an electing large partnership. Taxcut com Disqualified persons. Taxcut com   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Taxcut com Disqualified persons must figure it themselves, as explained earlier. Taxcut com   All the following are disqualified persons. Taxcut com Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Taxcut com Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Taxcut com 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. Taxcut com Average daily production is discussed earlier. Taxcut com 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. Taxcut com Natural gas sold under a fixed contract. Taxcut com   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Taxcut com 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. Taxcut com The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Taxcut com 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. Taxcut com Natural gas from geopressured brine. Taxcut com   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Taxcut com This is natural gas that is both the following. Taxcut com Produced from a well you began to drill after September 1978 and before 1984. Taxcut com Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Taxcut com Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Taxcut com Mines and other natural deposits. Taxcut com   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. Taxcut com   The following is a list of the percentage depletion rates for the more common minerals. Taxcut com 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. Taxcut com Corporate deduction for iron ore and coal. Taxcut com   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). Taxcut com Gross income from the property. Taxcut com   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Taxcut com Mining includes all the following. Taxcut com Extracting ores or minerals from the ground. Taxcut com Applying certain treatment processes described later. Taxcut com 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. Taxcut com Excise tax. Taxcut com   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. Taxcut com Extraction. Taxcut com   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. Taxcut com 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. Taxcut com Treatment processes. Taxcut com   The processes included as mining depend on the ore or mineral mined. Taxcut com To qualify as mining, the treatment processes must be applied by the mine owner or operator. Taxcut com For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Taxcut com Transportation of more than 50 miles. Taxcut com   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. Taxcut com    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. Taxcut com 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. Taxcut com For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Taxcut com irs. Taxcut com gov/irb/2013-01_IRB/ar11. Taxcut com html. Taxcut com Disposal of coal or iron ore. Taxcut com   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Taxcut com You disposed of it after holding it for more than 1 year. Taxcut com You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Taxcut com Treat any gain on the disposition as a capital gain. Taxcut com Disposal to related person. Taxcut com   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Taxcut com A related person (as listed in chapter 2 of Publication 544). Taxcut com A person owned or controlled by the same interests that own or control you. Taxcut com Geothermal deposits. Taxcut com   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Taxcut com A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Taxcut com For percentage depletion purposes, a geothermal deposit is not considered a gas well. Taxcut com   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Taxcut com See Gross income from the property , earlier, under Oil and Gas Wells. Taxcut com Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Taxcut com Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Taxcut com A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Taxcut com Bonuses and advanced royalties. Taxcut com   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. Taxcut com 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. Taxcut com Figuring cost depletion. Taxcut com   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. Taxcut com 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. Taxcut com Figuring percentage depletion. Taxcut com   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 . Taxcut com 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. Taxcut com 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. Taxcut com Ending the lease. Taxcut com   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. Taxcut com Do this for the year the lease ends or is abandoned. Taxcut com Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Taxcut com   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. Taxcut com Include this amount in income for the year the lease ends. Taxcut com Increase your adjusted basis in the property by the amount you include in income. Taxcut com Delay rentals. Taxcut com   These are payments for deferring development of the property. Taxcut com Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Taxcut com These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Taxcut com Timber You can figure timber depletion only by the cost method. Taxcut com Percentage depletion does not apply to timber. Taxcut com Base your depletion on your cost or other basis in the timber. Taxcut com Your cost does not include the cost of land or any amounts recoverable through depreciation. Taxcut com Depletion takes place when you cut standing timber. Taxcut com You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Taxcut com Figuring cost depletion. Taxcut com   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Taxcut com Timber units. Taxcut com   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Taxcut com You measure the timber using board feet, log scale, cords, or other units. Taxcut com If you later determine that you have more or less units of timber, you must adjust the original estimate. Taxcut com   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Taxcut com Depletion unit. Taxcut com   You figure your depletion unit each year by taking the following steps. Taxcut com Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Taxcut com Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Taxcut com Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Taxcut com 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. Taxcut com Divide the result of (2) by the result of (3). Taxcut com This is your depletion unit. Taxcut com Example. Taxcut com You bought a timber tract for $160,000 and the land was worth as much as the timber. Taxcut com Your basis for the timber is $80,000. Taxcut com 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). Taxcut com If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Taxcut com When to claim depletion. Taxcut com   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). Taxcut com 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. Taxcut com The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Taxcut com Example. Taxcut com The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Taxcut com You would deduct $20,000 of the $40,000 depletion that year. Taxcut com You would add the remaining $20,000 depletion to your closing inventory of timber products. Taxcut com Electing to treat the cutting of timber as a sale or exchange. Taxcut com   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Taxcut com You must make the election on your income tax return for the tax year to which it applies. Taxcut com 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. Taxcut com You generally report the gain as long-term capital gain. Taxcut com 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. Taxcut com For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Taxcut com   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Taxcut com The prior election (and revocation) is disregarded for purposes of making a subsequent election. Taxcut com See Form T (Timber), Forest Activities Schedule, for more information. Taxcut com Form T. Taxcut com   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. Taxcut com Prev  Up  Next   Home   More Online Publications