Page 99 - Small Business Taxes

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depletion for your partnership or S corporation Corporate deduction for iron ore and Disposal of coal or iron ore. You cannot take
interest on Schedule E (Form 1040). The deple- coal. The percentage depletion deduction of a a percentage depletion deduction for coal (in-
tion deducted on Schedule E is included in fig- corporation for iron ore and coal (including lig- cluding lignite) or iron ore mined in the United
uring income or loss from rental real estate or nite) is reduced by 20% (0.20) of: States if both of the following apply.
royalty properties. The Instructions for Sched- • The percentage depletion deduction for • You disposed of it after holding it for more
ule E (Form 1040) explain where to report this the tax year (figured without this reduc- than 1 year.
income or loss and whether you need to file ei- tion), minus • You disposed of it under a contract under
ther of the following forms. • The adjusted basis of the property at the which you retain an economic interest in
• Form 6198. close of the tax year (figured without the the coal or iron ore.
• Form 8582. depletion deduction for the tax year). Treat any gain on the disposition as a capital

Natural Gas Wells Gross income from the property. For prop- gain.
erty other than a geothermal deposit or an oil or Disposal to related person. This rule
You can use percentage depletion for a well gas well, gross income from the property does not apply if you dispose of the coal or iron
that produces natural gas that is either: means the gross income from mining. Mining ore to one of the following persons.
• Regulated natural gas, includes all of the following. • A related person (as listed in chapter 2 of
• Sold under a fixed contract, or • Extracting ores or minerals from the Pub. 544).
• Produced from geopressured brine. ground. • A person owned or controlled by the same
• Applying certain treatment processes de- interests that own or control you.
Regulated natural gas. Regulated natural gas scribed below.
qualifies for a percentage depletion rate of 22%. • Transporting ores or minerals (generally, Geothermal deposits. Geothermal deposits
Regulated natural gas is domestic natural gas not more than 50 miles) from the point of located in the United States or its possessions
produced and sold by the producer before July extraction to the plants or mills in which the qualify for a percentage depletion rate of 15%.
1, 1976, and is regulated by the Federal Power treatment processes are applied. A geothermal deposit is a geothermal reservoir
Commission. The price for regulated gas can- Excise tax. Gross income from mining in- of natural heat stored in rocks or in a watery liq-
not be adjusted to reflect any increase in the cludes the separately stated excise tax re- uid or vapor (whether or not under pressure).
seller’s tax liability because of the repeal of per- ceived by a mine operator from the sale of coal For percentage depletion purposes, a geother-
centage depletion for gas. Price increases after to compensate the operator for the excise tax mal deposit is not considered a gas well.
February 1, 1975, are presumed to take the in- the mine operator must pay to finance the bene- Figure gross income from the property for a
crease in tax liability into account unless dem- fits provided under the Black Lung Benefits geothermal steam well in the same way as for
onstrated otherwise by clear and convincing Revenue Act of 1977. oil and gas wells. See Gross income from the
evidence. property, earlier, under Oil and Gas Wells. Per-
Extraction. Extracting ores or minerals centage depletion on a geothermal deposit can-
Natural gas sold under a fixed contract. from the ground includes extraction by mine not be more than 50% of your taxable income
Natural gas sold under a fixed contract qualifies owners or operators of ores or minerals from from the property.
for a percentage depletion rate of 22%. Natural the waste or residue of prior mining. This does
gas sold under a fixed contract is domestic nat- not apply to extraction from waste or residue of Lessor's Gross Income
ural gas sold by the producer under a contract prior mining by the purchaser of the waste or
that does not provide for a price increase to re- residue or the purchaser of the rights to extract In the case of leased property, the depletion de-
flect any increase in the seller's tax liability be- ores or minerals from the waste or residue. duction is divided between the lessor and the
cause of the repeal of percentage depletion for lessee.
gas. The contract must have been in effect from Treatment processes. The processes in-
February 1, 1975, until the date of sale of the cluded as mining depend on the ore or mineral A lessor's gross income from the property
gas. Price increases after February 1, 1975, are mined. To qualify as mining, the treatment pro- that qualifies for percentage depletion is usually
presumed to take the increase in tax liability into cesses must be applied by the mine owner or the total of the royalties received from the lease.
account unless demonstrated otherwise by operator. For a listing of treatment processes
clear and convincing evidence. considered as mining, see section 613(c)(4) Bonuses and advanced royalties. Bonuses
and the related regulations. and advanced royalties are payments a lessee
Natural gas from geopressured brine. Transportation of more than 50 miles. If makes before production to a lessor for the
Qualified natural gas from geopressured brine ore or mineral must be transported more than grant of rights in a lease or for minerals, gas, or
is eligible for a percentage depletion rate of 50 miles to plants or mills to be treated because oil to be extracted from leased property. If you
10%. This is natural gas that meets both of the of physical and other requirements, the addi- are the lessor, your income from bonuses and
following conditions. tional authorized transportation may be consid- advanced royalties received is subject to an al-
• Produced from a well you began to drill af- ered mining and included in the calculation of lowance for depletion, as explained in the next
ter September 1978 and before 1984. gross income from mining if authorized by the two paragraphs.
• Determined in accordance with section IRS.
503 of the Natural Gas Policy Act of 1978 Figuring cost depletion. To figure cost
to be produced from geopressured brine. If you wish to include transportation of depletion on a bonus, multiply your adjusted ba-
more than 50 miles in the calculation of sis in the property by a fraction, the numerator
gross income from mining, request an
Mines and Geothermal advance ruling from the IRS. Include in the re- of which is the bonus and the denominator of
which is the total bonus and royalties expected
Deposits quest the facts about the physical and other re- to be received. To figure cost depletion on ad-
quirements that prevented the construction and vanced royalties, use the calculation explained
Certain mines, oil and gas wells, and other nat- operation of the plant (in which mining pro- earlier under Cost Depletion, treating the num-
ural deposits, including geothermal deposits, cesses are applied) within 50 miles of the point ber of units for which the advanced royalty is re-
qualify for percentage depletion. of extraction. For more information about re- ceived as the number of units sold.
questing an advance ruling, see Rev. Proc.
Mines, oil and gas wells, and other natural 2022-1, available at IRS.gov/irb/2022-01_IRB, Figuring percentage depletion. In the
deposits. The percentage of your gross in- modified by Rev. Proc. 2022-10, available at case of mines, wells, and other natural deposits
come from the property that you can deduct as IRS.gov/irb/2022-06_IRB, AND superseded by other than gas, oil, or geothermal property, you
depletion depends on the type of deposit. Rev. Proc. 2023-1, available at IRS.gov/irb/ may use the percentage rates discussed earlier
See section 613(b) for the percentage de- 2023-01_IRB. under Mines and Geothermal Deposits. Any bo-
pletion rates. nus or advanced royalty payments are gener-
ally part of the gross income from the property
to which the rates are applied in making the
Page 40 Chapter 9 Depletion