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Taxmap/pubs/p535-049.htm#TXMP3c2d14d0 Chapter 10 Depletion

Depletion

Taxmap/pubs/p535-049.htm#TXMP66fcc4bb What's New

Taxmap/pubs/p535-049.htm#TXMP1cf75b5d
Elective safe harbor for owners of oil and gas property.

For tax years ending after March 7, 2004, owners of oil and gas property may use an elective safe harbor in determining the property's recoverable reserves for purposes of computing cost depletion. For more information, see Elective safe harbor for owners of oil and gas property, under Cost Depletion, later.

Introduction

Depletion is the using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves.

There are two ways of figuring depletion: cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion.

Taxmap/pubs/p535-049.htm#TXMP42a027a4 Who Can   Claim Depletion?

Depletion

If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. More than one person can have an economic interest in the same mineral deposit or timber.

You have an economic interest if both the following apply.

• You have acquired by investment any interest in mineral deposits or standing timber.
• 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.

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. A production payment carved out of, or retained on the sale of, mineral property is not an economic interest.

Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax.

Previous Page:  Publication 535 - Business Expenses - Research and Experimental Costs Next Page:  Publication 535 - Business Expenses - Mineral Property Use     to find additional instances of index items.