Page 98 - Small Business Taxes

16:31 - 2-Feb-2023
Page 39 of 57
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.
from the property, later) by 15% (0.15). If your quantity among the following related persons in your deduction for percentage depletion is limi-
average daily production of domestic oil or gas proportion to each business entity's or family ted to the smaller of the following.
exceeds your depletable oil or gas quantity, you member's production of domestic oil or gas for • 100% of your taxable income from the
must make an allocation as explained later un- the year. property figured without the deduction for
der Average daily production. • Corporations, trusts, and estates if 50% or depletion and the deduction for qualified
In addition, there is a limit on the percentage more of the beneficial interest is owned by business income under section 199A. For
depletion deduction. See Taxable income limit, the same or related persons (considering a definition of taxable income from the
later. only persons that own at least 5% of the property, see Taxable income limit, earlier,
beneficial interest). under Mineral Property.
Average daily production. Figure your aver- • You and your spouse and minor children. • 65% of your taxable income for the year
age daily production by dividing your total do- A related person is anyone mentioned in the re- figured without the deduction for depletion,
mestic production of oil or gas for the tax year lated persons discussion under Nondeductible the deduction for qualified business in-
by the number of days in your tax year. loss in chapter 2 of Pub. 544, except that for come under section 199A, any net operat-
Partial interest. If you have a partial inter- purposes of this allocation, item (1) in that dis- ing loss carryback to the tax year under
section 172, any capital loss carryback to
est in the production from a property, figure cussion includes only an individual, spouse, the tax year under section 1212, and in the
your share of the production by multiplying total and their minor children. case of a trust, any distribution to its bene-
production from the property by your percent- Controlled group of corporations. Mem- ficiary (with certain exceptions).
age participation in the revenues from the prop- bers of the same controlled group of corpora-
erty. tions are treated as one taxpayer when figuring You can carry over to the following year any
You have a partial interest in the production the depletable oil or natural gas quantity. They amount you cannot deduct because of the
from a property if you have a net profits interest share the depletable quantity. A controlled 65%-of-taxable-income limit. Add it to your de-
in the property. To figure the share of produc- group of corporations is defined in section pletion allowance (before applying any limits)
tion for your net profits interest, you must first 1563(a), except that, for this purpose, the stock for the following year.
determine your percentage participation (as ownership requirement is “more than 50%”
measured by the net profits) in the gross reve- rather than “at least 80%,” as described in sec- Partnerships and S Corporations
nue from the property. To figure this percent- tion 1563(a).
age, you divide the income you receive for your Generally, each partner or S corporation share-
net profits interest by the gross revenue from Gross income from the property. For purpo- holder, and not the partnership or S corpora-
the property. Then multiply the total production ses of percentage depletion, gross income from tion, figures the depletion allowance separately.
from the property by your percentage participa- the property (in the case of oil and gas wells) is Each partner or shareholder must decide
tion to figure your share of the production. the amount you receive from the sale of the oil whether to use cost or percentage depletion. A
Example. Riley owns oil property in which or gas in the immediate vicinity of the well. If partner or shareholder using percentage deple-
you do not sell the oil or gas on the property but
tion must apply the 65%-of-taxable-income limit
Finley owns a 20% net profits interest. During manufacture or convert it into a refined product using its taxable income from all sources.
the year, the property produced 10,000 barrels before sale, or transport it before sale, the gross
of oil, which Riley sold for $200,000. Riley had income from the property is the representative Partner's or shareholder's adjusted basis.
expenses of $90,000 attributable to the prop- market or field price (RMFP) of the oil or gas The partnership or S corporation must allocate
erty. The property generated a net profit of before conversion or transportation. to each partner or shareholder its share of the
$110,000 ($200,000 − $90,000). Finley re- However, if you sold gas after you transpor- adjusted basis of each oil or gas property held
ceived income of $22,000 ($110,000 × 20% ted it from the premises for a price that is lower by the partnership or S corporation. The part-
(0.20)) as Finley’s net profits interest. than the RMFP, determine gross income from nership or S corporation makes the allocation
The percentage participation that Finley de- as of the date it acquires the oil or gas property.
termined was 11%, figured by dividing $22,000 the property for percentage depletion purposes Each partner's share of the adjusted basis of
without regard to the RMFP.
(income received) by $200,000 (the gross reve- the oil or gas property is generally figured ac-
nue from the property). Finley’s share of the oil Gross income from the property does not in- cording to that partner's interest in partnership
production was determined to be 1,100 barrels clude lease bonuses, advance royalties, or capital. However, in some cases, it is figured
(10,000 barrels × 11% (0.11)). other amounts payable without regard to pro-
duction from the property. according to the partner's interest in partnership
Depletable oil or natural gas quantity. Gen- income.
erally, your depletable oil quantity is 1,000 bar- Average daily production exceeds depleta- The partnership or S corporation adjusts the
rels. Your depletable natural gas quantity is ble quantities. If your average daily produc- partner's or shareholder's share of the adjusted
6,000 cubic feet multiplied by the number of tion for the year is more than your depletable oil basis of the oil and gas property for any capital
barrels of your depletable oil quantity that you or natural gas quantity, figure your allowance for expenditures made for the property and for any
choose to apply. If you claim depletion on both depletion for each domestic oil or natural gas change in partnership or S corporation inter-
oil and natural gas, you must reduce your de- property as follows. ests.
pletable oil quantity (1,000 barrels) by the num- 1. Figure your average daily production of oil Recordkeeping. Each partner or
ber of barrels you use to figure your depletable or natural gas for the year. shareholder must separately keep re-
natural gas quantity. cords of its share of the adjusted basis
2. Figure your depletable oil or natural gas in each oil and gas property of the partnership
RECORDS
Example. You have both oil and natural quantity for the year. or S corporation. The partner or shareholder
gas production. To figure your depletable natu- 3. Figure depletion for all oil or natural gas must reduce its applicable adjusted basis by
ral gas quantity, you choose to apply 360 bar- produced from the property using a per- the depletion allowed or allowable on the prop-
rels of your 1,000-barrel depletable oil quantity. centage depletion rate of 15% (0.15). erty each year. The partner or shareholder must
Your depletable natural gas quantity is 2.16 mil- use that reduced adjusted basis to figure cost
lion cubic feet of gas (360 × 6,000). You must 4. Multiply the result figured in (3) by a frac- depletion, or its gain or loss, if the partnership
reduce your depletable oil quantity to 640 bar- tion, the numerator of which is the result or S corporation disposes of the property.
rels (1,000 – 360). figured in (2) and the denominator of
If you have production from marginal wells, which is the result figured in (1). This is
see section 613A(c)(6) to figure your depletable your depletion allowance for that property Reporting the deduction. Information that
oil or natural gas quantity. See also Notice for the year. you, as a partner or shareholder, use to figure
your depletion deduction on oil and gas proper-
2022-24, available at IRS.gov/irb/2022-21_IRB.
Taxable income limit. If you are an independ- ties is reported by the partnership or S corpora-
Business entities and family members. ent producer or royalty owner of oil and gas, tion on Schedule K-1 (Form 1065) or on Sched-
You must allocate the depletable oil or gas ule K-1 (Form 1120-S). Deduct oil and gas
Chapter 9 Depletion Page 39