Page 85 - Small Business Taxes

16:31 - 2-Feb-2023
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Fileid: … tions/p535/2022/a/xml/cycle01/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
costs, you may be able to take the research How to make the election. You elect to de- Partnerships and S corporations. Each
credit. For more information, see Form 6765 duct IDCs as a current business expense by partner, not the partnership, elects whether to
and its instructions. taking the deduction on your income tax return capitalize or to deduct that partner's share of
for the first tax year you have eligible costs. No exploration costs. Each shareholder, not the S
Payroll tax credit. The payroll tax credit is an formal statement is required. If you file Sched- corporation, elects whether to capitalize or to
annual election made by a qualified small busi- ule C (Form 1040), enter these costs under deduct that shareholder's share of exploration
ness specifying the amount of research credit, “Other expenses.” costs.
not to exceed $250,000, that may be used For oil and gas wells, your election is bind-
against the employer portion of social security ing for the year it is made and for all later years. Reduced corporate deductions for explora-
liability. The credit is the smallest of the current For geothermal wells, your election can be re- tion costs. A corporation (other than an S cor-
year research credit, an elected amount not to voked by the filing of an amended return on poration) can deduct only 70% of its domestic
exceed $250,000, or the general business which you do not take the deduction. You can exploration costs. It must capitalize the remain-
credit carryforward for the tax year (before the file the amended return for the year up to the ing 30% of costs and amortize them over the
application of the payroll tax credit election for normal time of expiration for filing a claim for 60-month period starting with the month the ex-
the tax year). The election must be made on or credit or refund, generally, within 3 years after ploration costs are paid or incurred. A corpora-
before the due date of the originally filed return the date you filed the original return or within 2 tion may also elect to capitalize and amortize
(including extensions). An election cannot be years after the date you paid the tax, whichever mining exploration costs over a 10-year period.
made for a tax year if an election was made for is later. For more information on this method of amorti-
5 or more preceding tax years. The election zation, see section 59(e).
made by a partnership or S corporation is made Energy credit for costs of geothermal wells. The 30% that the corporation capitalizes
at the entity level. If you capitalize the drilling and development cannot be added to its basis in the property to
A qualified small business that elects to costs of geothermal wells that you place in serv- figure cost depletion. However, the amount
claim the payroll tax credit will claim the payroll ice during the tax year, you may be able to amortized is treated as additional depreciation
tax credit against the employer's portion of so- claim a business energy credit. See the Instruc- and is subject to recapture as ordinary income
cial security tax on its employment tax return for tions for Form 3468 for more information. on a disposition of the property. See Section
the first quarter that begins after it files the re- 1250 Property under Depreciation Recapture in
turn reflecting the payroll tax election. For more Nonproductive well. If you capitalize your chapter 3 of Pub. 544.
information, see the Instructions for Form 6765. IDCs, you have another option if the well is non- These rules also apply to the deduction of
productive. You can deduct the IDCs of the development costs by corporations. See Devel-
Intangible Drilling Costs nonproductive well as an ordinary loss. You opment Costs, later.
must indicate and clearly state your election on
your tax return for the year the well is comple- Recapture of exploration expenses. When
The costs of developing oil, gas, or geothermal ted. Once made, the election for oil and gas your mine reaches the producing stage, you
wells are ordinarily capital expenditures. You wells is binding for all later years. You can re- must recapture any exploration costs you elec-
can usually recover them through depreciation voke your election for a geothermal well by filing ted to deduct. Use either of the following meth-
or depletion. However, you can elect to deduct an amended return that does not claim the loss. ods.
intangible drilling costs (IDCs) as a current busi- Method 1—Include the deducted costs in
ness expense. These are certain drilling and Costs incurred outside the United States. gross income for the tax year the mine rea-
development costs for wells in the United You cannot deduct as a current business ex- ches the producing stage. Your election
States in which you hold an operating or work- pense all the IDCs paid or incurred for an oil, must be clearly indicated on the return. In-
ing interest. You can deduct only costs for drill- gas, or geothermal well located outside the Uni- crease your adjusted basis in the mine by
ing or preparing a well for the production of oil, ted States. However, you can elect to include the amount included in income. Generally,
gas, or geothermal steam or hot water. the costs in the adjusted basis of the well to fig- you must elect this recapture method by
ure depletion or depreciation. If you do not the due date (including extensions) of your
You can elect to deduct only the costs of make this election, you can deduct the costs return. However, if you timely filed your re-
items with no salvage value. These include wa- over the 10-year period beginning with the tax turn for the year without making the elec-
ges, fuel, repairs, hauling, and supplies related year in which you paid or incurred them. These tion, you can still make the election by filing
to drilling wells and preparing them for produc- rules do not apply to a nonproductive well. an amended return within 6 months of the
tion. Your cost for any drilling or development due date of the return (excluding exten-
work done by contractors under any form of sions). Make the election on your amended
contract is also an IDC. However, see Amounts Exploration Costs
paid to contractor that must be capitalized, return and write “Filed pursuant to section
301.9100-2” on the form where you are in-
later. The costs of determining the existence, loca- cluding the income. File the amended re-
You can also elect to deduct the cost of drill- tion, extent, or quality of any mineral deposit are turn at the same address you filed the origi-
ing exploratory bore holes to determine the lo- ordinarily capital expenditures if the costs lead nal return.
to the development of a mine. You recover
cation and delineation of offshore hydrocarbon these costs through depletion as the mineral is Method 2—Do not claim any depletion de-
deposits if the shaft is capable of conducting removed from the ground. However, you can duction for the tax year the mine reaches
hydrocarbons to the surface on completion. It elect to deduct domestic exploration costs paid the producing stage and any later tax years
does not matter whether there is any intent to or incurred before the beginning of the develop- until the depletion you would have deduc-
produce hydrocarbons. ment stage of the mine (except those for oil and ted equals the exploration costs you de-
ducted.
If you do not elect to deduct your IDCs as a gas wells). You must also recapture deducted explora-
current business expense, you can elect to de- tion costs if you receive a bonus or royalty from
duct them over the 60-month period beginning How to make the election. You elect to de- mine property before it reaches the producing
with the month they were paid or incurred. duct exploration costs by taking the deduction stage. Do not claim any depletion deduction for
on your income tax return, or on an amended the tax year you receive the bonus or royalty
Amounts paid to contractor that must be income tax return, for the first tax year for which and any later tax years until the depletion you
capitalized. Amounts paid to a contractor you wish to deduct the costs paid or incurred would have deducted equals the exploration
must be capitalized if they are either: during the tax year. Your return must ade- costs you deducted.
• Amounts properly allocable to the cost of quately describe and identify each property or Generally, if you dispose of the mine before
depreciable property, or mine, and clearly state how much is being de- you have fully recaptured the exploration costs
• Amounts paid only out of production or ducted for each one. The election applies to the you deducted, recapture the balance by treating
proceeds from production if these amounts tax year you make this election and all later tax all or part of your gain as ordinary income.
are depletable income to the recipient. years.
Page 26 Chapter 7 Costs You Can Deduct or Capitalize