Page 97 - Small Business Taxes

16:31 - 2-Feb-2023
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
gross income from the property is under Oil and Independent Producers and person to occupy any retail outlet
Gas Wells, later. For other property, more infor- Royalty Owners owned, leased, or controlled by you or
mation about the definition of gross income a related person.
from the property is under Mines and Geother- If you are an independent producer or royalty 2. The combined gross receipts from sales
mal Deposits, later. owner, you figure percentage depletion using a (not counting resales) of oil, natural gas, or
rate of 15% of the gross income from the prop-
Taxable income limit. The percentage deple- erty based on your average daily production of their byproducts by all retail outlets taken
into account in (1) are more than $5 million
tion deduction generally cannot be more than domestic crude oil or domestic natural gas up to
50% (100% for oil and gas property) of your tax- your depletable oil or natural gas quantity. How- for the tax year.
able income from the property figured without ever, an independent producer or royalty owner For the purpose of determining if this rule
the depletion deduction, and any deduction un- that also acts as a retailer or refiner may be ex- applies, do not count the following.
der section 199A. cluded from claiming percentage depletion. For • Bulk sales (sales in very large quantities)
Taxable income from the property means information on figuring the deduction, see Figur- of oil or natural gas to commercial or indus-
gross income from the property minus all allow- ing percentage depletion, later. trial users.
able deductions (except any deduction for de- • Bulk sales of aviation fuels to the Depart-
pletion or qualified business income) attributa- Refiners who cannot claim percentage de- ment of Defense.
ble to mining processes, including limited pletion. You cannot claim percentage deple- • Sales of oil or natural gas or their byprod-
mining transportation. These deductible items tion if you or a related person refines crude oil ucts outside the United States if none of
include, but are not limited to, the following. and you and the related person refined more your domestic production or that of a rela-
• Operating expenses. than 75,000 barrels on any day during the tax ted person is exported during the tax year
• Certain selling expenses. year based on average (rather than actual) daily or the prior tax year.
• Administrative and financial overhead. refinery runs for the tax year. The average daily
• Depreciation. refinery run is figured by dividing total refinery Related person. To determine if you and
• Intangible drilling and development costs. runs for the tax year by the total number of days another person are related persons, see Rela-
• Exploration and development expendi- in the tax year. ted person under Refiners who cannot claim
tures. percentage depletion, earlier.
• Deductible taxes (see chapter 5), but not Related person. You and another person Sales through a related person. You are
taxes that you capitalize or take as a credit. are related persons if either of you holds a sig- considered to be selling oil or natural gas (or a
• Losses sustained. nificant ownership interest in the other person product derived therefrom) through a related
or if a third person holds a significant ownership
The following rules apply when figuring your interest in both of you. person if any sale by the related person produ-
taxable income from the property for purposes ces gross income from which you may benefit
of the taxable income limit. For example, a corporation, partnership, es- because of your direct or indirect ownership in-
• Do not deduct any net operating loss tate, or trust and anyone who holds a significant terest in the related person.
(NOL) deduction from the gross income ownership interest in it are related persons. A You are not considered to be selling oil or
from the property. partnership and a trust are related persons if natural gas (or a product derived therefrom)
• Corporations do not deduct charitable con- one person holds a significant ownership inter- through a related person who is a retailer if all of
tributions from the gross income from the est in each of them. the following apply.
property. • You do not own a significant ownership in-
• If, during the year, you dispose of an item For purposes of the related person rules, terest in the retailer.
of section 1245 property that was used in significant ownership interest means direct or • You sell your production to persons who
connection with mineral property, reduce indirect ownership of 5% or more in any one of are not related to either you or the retailer.
any allowable deduction for mining expen- the following. • The retailer does not buy oil or natural gas
ses by the part of any gain you must report from your customers or persons related to
as ordinary income that is allocable to the • The value of the outstanding stock of a your customers.
mineral property. See Regulations section corporation. • There are no arrangements for the retailer
1.613-5(b)(1) for information on how to fig- • The interest in the profits or capital of a to acquire oil or natural gas you produced
ure the ordinary gain allocable to the prop- partnership. for resale or made available for purchase
erty. • The beneficial interests in an estate or by the retailer.
trust. • Neither you nor the retailer knows of, or
Oil and Gas Wells Any interest owned by or for a corporation, controls, the final disposition of the oil or
natural gas you sold or the original source
partnership, trust, or estate is considered to be of the petroleum products the retailer ac-
You cannot claim percentage depletion for an owned directly both by itself and proportionately quired for resale.
oil or gas well unless at least one of the follow- by its shareholders, partners, or beneficiaries.
ing applies. Transferees who cannot claim percentage
• You are either an independent producer or Retailers who cannot claim percentage de- depletion. You cannot claim percentage de-
a royalty owner. pletion. You cannot claim percentage deple- pletion if you received your interest in a proven
• The well produces one of the following: tion if both the following apply. oil or gas property by transfer after 1974 and
regulated natural gas, natural gas sold un- before October 12, 1990. For a definition of the
der a fixed contract, or natural gas from ge- 1. You sell oil or natural gas or their byprod- term “transfer,” see Regulations section
opressured brine. ucts directly or through a related person in 1.613A-7(n). For a definition of the term “inter-
any of the following situations.
If you are an independent producer or roy- est in proven oil or gas property,” see Regula-
alty owner, see Independent Producers and a. Through a retail outlet operated by tions section 1.613A-7(p).
Royalty Owners next. you or a related person. Figuring percentage depletion. Generally,
For information on the depletion deduction b. To any person who is required under as an independent producer or royalty owner,
for wells that produce regulated natural gas, an agreement with you or a related you figure your percentage depletion by figuring
natural gas sold under a fixed contract, or natu- person to use a trademark, trade your average daily production of domestic oil or
ral gas from geopressured brine, see Natural name, or service mark or name gas and comparing it to your depletable oil or
Gas Wells, later. owned by you or a related person in gas quantity. If your average daily production
marketing or distributing oil, natural does not exceed your depletable oil or gas
gas, or their byproducts. quantity, you figure your percentage depletion
c. To any person given authority under by multiplying the gross income from the oil or
an agreement with you or a related gas property (as defined under Gross income
Page 38 Chapter 9 Depletion