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1040x For 2012

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1040x For 2012

1040x for 2012 4. 1040x for 2012   Limit on Elective Deferrals Table of Contents Excess elective deferrals. 1040x for 2012 General Limit 15-Year RuleYears of Service Figuring the Limit on Elective DeferralsExample The second and final component of MAC is the limit on elective deferrals. 1040x for 2012 This is a limit on the amount of contributions that can be made to your account through a salary reduction agreement. 1040x for 2012 A salary reduction agreement is an agreement between you and your employer that allows for a portion of your compensation to be directly invested in a 403(b) account on your behalf. 1040x for 2012 You can enter into more than one salary reduction agreement during a year. 1040x for 2012 More than one 403(b) account. 1040x for 2012 If, for any year, elective deferrals are contributed to more than one 403(b) account for you (whether or not with the same employer), you must combine all the elective deferrals to determine whether the total is more than the limit for that year. 1040x for 2012 403(b) plan and another retirement plan. 1040x for 2012 If, during the year, contributions in the form of elective deferrals are made to other retirement plans on your behalf, you must combine all of the elective deferrals to determine if they are more than your limit on elective deferrals. 1040x for 2012 The limit on elective deferrals applies to amounts contributed to: 401(k) plans, to the extent excluded from income, Roth contribution programs, Section 501(c)(18) plans, to the extent excluded from income, Savings incentive match plan for employees (SIMPLE plans), Simplified employee pension (SEP) plans, and All 403(b) plans. 1040x for 2012 Roth contribution program. 1040x for 2012   Your 403(b) plan may allow you to designate all or a portion of your elective deferrals as Roth contributions. 1040x for 2012 Elective deferrals designated as Roth contributions must be maintained in a separate Roth account and are not excludable from your gross income. 1040x for 2012   The maximum amount of contributions allowed under a Roth contribution program is your limit on elective deferrals, less your elective deferrals not designated as Roth contributions. 1040x for 2012 For more information on the Roth contribution program, see Publication 560, Retirement Plans for Small Business. 1040x for 2012 Excess elective deferrals. 1040x for 2012   If the amount contributed is more than the allowable limit, you must include the excess that is not a Roth contribution in your gross income for the year contributed. 1040x for 2012 General Limit Under the general limit on elective deferrals, the most that can be contributed to your 403(b) account through a salary reduction agreement is $17,500 for 2013 and 2014. 1040x for 2012 This limit applies without regard to community property laws. 1040x for 2012 15-Year Rule If you have at least 15 years of service with an educational organization (such as a public or private school), hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), the limit on elective deferrals to your 403(b) account is increased by the least of: $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in prior years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. 1040x for 2012 If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013 and 2014. 1040x for 2012 To determine whether you have 15 years of service with your employer, see Years of Service , next. 1040x for 2012 Years of Service To determine if you are eligible for the increased limit on elective deferrals, you will first need to figure your years of service. 1040x for 2012 How you figure your years of service depends on whether you were a full-time or a part-time employee, whether you worked for the full year or only part of the year, and whether you have worked for your employer for an entire year. 1040x for 2012 You must figure years of service for each year during which you worked for the employer who is maintaining your 403(b) account. 1040x for 2012 If more than one employer maintains a 403(b) account for you in the same year, you must figure years of service separately for each employer. 1040x for 2012 Definition Your years of service are the total number of years you have worked as a full time employee for the employer maintaining your 403(b) account as of the end of the year. 1040x for 2012 Figuring Your Years of Service Take the following rules into account when figuring your years of service. 1040x for 2012 Status of employer. 1040x for 2012   Your years of service include only periods during which your employer was a qualified employer. 1040x for 2012 Your plan administrator can tell you whether or not your employer was qualified during all your periods of service. 1040x for 2012 Service with one employer. 1040x for 2012   Generally, you cannot count service for any employer other than the one who maintains your 403(b) account. 1040x for 2012 Church employee. 1040x for 2012   If you are a church employee, treat all of your years of service with related church organizations as years of service with the same employer. 1040x for 2012 For more information about church employees, see chapter 5. 1040x for 2012 Self-employed ministers. 1040x for 2012   If you are a self-employed minister, your years of service include full and part years in which you have been treated as employed by a tax-exempt organization that is a qualified employer. 1040x for 2012 Total years of service. 1040x for 2012   When figuring prior years of service, figure each year individually and then add the individual years of service to determine your total years of service. 1040x for 2012 Example. 1040x for 2012 The annual work period for full-time teachers employed by ABC Public Schools is September through December and February through May. 1040x for 2012 Marsha began working with ABC schools in September 2009. 1040x for 2012 She has always worked full-time for each annual work period. 1040x for 2012 At the end of 2013, Marsha had 4. 1040x for 2012 5 years of service with ABC Public Schools, as shown in Table 4-1. 1040x for 2012 Table 4-1. 1040x for 2012 Marsha's Years of Service Note. 1040x for 2012 This table shows how Marsha figures her years of service, as explained in the previous example. 1040x for 2012 Year Period Worked Portion of Work Period Years of Service 2009 Sept. 1040x for 2012 –Dec. 1040x for 2012 . 1040x for 2012 5 year . 1040x for 2012 5 year 2010 Feb. 1040x for 2012 –May . 1040x for 2012 5 year 1 year Sept. 1040x for 2012 –Dec. 1040x for 2012 . 1040x for 2012 5 year 2011 Feb. 1040x for 2012 –May . 1040x for 2012 5 year 1 year Sept. 1040x for 2012 –Dec. 1040x for 2012 . 1040x for 2012 5 year 2012 Feb. 1040x for 2012 –May . 1040x for 2012 5 year 1 year Sept. 1040x for 2012 –Dec. 1040x for 2012 . 1040x for 2012 5 year 2013 Feb. 1040x for 2012 –May . 1040x for 2012 5 year 1 year Sept. 1040x for 2012 –Dec. 1040x for 2012 . 1040x for 2012 5 year Total years of service 4. 1040x for 2012 5 years Full-time or part-time. 1040x for 2012   To figure your years of service, you must analyze each year individually and determine whether you worked full-time for the full year or something other than full-time. 1040x for 2012 When determining whether you worked full-time or something other than full-time, use your employer's annual work period as the standard. 1040x for 2012 Employer's annual work period. 1040x for 2012   Your employer's annual work period is the usual amount of time an individual working full-time in a specific position is required to work. 1040x for 2012 Generally, this period of time is expressed in days, weeks, months, or semesters, and can span 2 calendar years. 1040x for 2012 Note. 1040x for 2012 You cannot accumulate more than 1 year of service in a 12-month period. 1040x for 2012 Example. 1040x for 2012 All full-time teachers at ABC Public Schools are required to work both the September through December semester and the February through May semester. 1040x for 2012 Therefore, the annual work period for full-time teachers employed by ABC Public Schools is September through December and February through May. 1040x for 2012 Teachers at ABC Public Schools who work both semesters in the same calendar year are considered working a full year of service in that calendar year. 1040x for 2012 Full-Time Employee for the Full Year Count each full year during which you were employed full-time as 1 year of service. 1040x for 2012 In determining whether you were employed full-time, compare the amount of work you were required to perform with the amount of work normally required of others who held the same position with the same employer and who generally received most of their pay from the position. 1040x for 2012 How to compare. 1040x for 2012   You can use any method that reasonably and accurately reflects the amount of work required. 1040x for 2012 For example, if you are a teacher, you can use the number of hours of classroom instruction as a measure of the amount of work required. 1040x for 2012   In determining whether positions with the same employer are the same, consider all of the facts and circumstances concerning the positions, including the work performed, the methods by which pay is determined, and the descriptions (or titles) of the positions. 1040x for 2012 Example. 1040x for 2012 An assistant professor employed in the English department of a university will be considered a full-time employee if the amount of work that he or she is required to perform is the same as the amount of work normally required of assistant professors of English at that university who get most of their pay from that position. 1040x for 2012   If no one else works for your employer in the same position, compare your work with the work normally required of others who held the same position with similar employers or similar positions with your employer. 1040x for 2012 Full year of service. 1040x for 2012   A full year of service for a particular position means the usual annual work period of anyone employed full-time in that general type of work at that place of employment. 1040x for 2012 Example. 1040x for 2012 If a doctor works for a hospital 12 months of a year except for a 1-month vacation, the doctor will be considered as employed for a full year if the other doctors at that hospital also work 11 months of the year with a 1-month vacation. 1040x for 2012 Similarly, if the usual annual work period at a university consists of the fall and spring semesters, an instructor at that university who teaches these semesters will be considered as working a full year. 1040x for 2012 Other Than Full-Time for the Full Year If, during any year, you were employed full-time for only part of your employer's annual work period, part-time for the entire annual work period, or part-time for only part of the work period, your year of service for that year is a fraction of your employer's annual work period. 1040x for 2012 Full-time for part of the year. 1040x for 2012   If, during a year, you were employed full-time for only part of your employer's annual work period, figure the fraction for that year as follows: The numerator (top number) is the number of weeks, months, or semesters you were a full-time employee. 1040x for 2012 The denominator (bottom number) is the number of weeks, months, or semesters considered the normal annual work period for the position. 1040x for 2012 Example. 1040x for 2012 Jason was employed as a full-time instructor by a local college for the 4 months of the 2013 spring semester (February 2013 through May 2013). 1040x for 2012 The annual work period for the college is 8 months (February through May and July through October). 1040x for 2012 Given these facts, Jason was employed full-time for part of the annual work period and provided ½ of a year of service. 1040x for 2012 Jason's years of service computation for 2013 is as follows: Number of months Jason worked = 4 = 1 Number of months in annual work period 8 2 Part-time for the full year. 1040x for 2012   If, during a year, you were employed part-time for the employer's entire annual work period, you figure the fraction for that year as follows: The numerator (top number) is the number of hours or days you worked. 1040x for 2012 The denominator (bottom number) is the number of hours or days normally required of someone holding the same position who works full-time. 1040x for 2012 Example. 1040x for 2012 Vance teaches one course at a local medical school. 1040x for 2012 He teaches 3 hours per week for two semesters. 1040x for 2012 Other faculty members at the same school teach 9 hours per week for two semesters. 1040x for 2012 The annual work period of the medical school is two semesters. 1040x for 2012 An instructor teaching 9 hours a week for two semesters is considered a full-time employee. 1040x for 2012 Given these facts, Vance has worked part-time for a full annual work period. 1040x for 2012 Vance has completed 1/3 of a year of service, figured as shown below. 1040x for 2012 Number of hours per week Vance worked = 3 = 1 Number of hours per week considered full-time 9 3 Part-time for part of the year. 1040x for 2012   If, during any year, you were employed part-time for only part of your employer's annual work period, you figure your fraction for that year by multiplying two fractions. 1040x for 2012   Figure the first fraction as though you had worked full-time for part of the annual work period. 1040x for 2012 The fraction is as follows: The numerator (top number) is the number of weeks, months, or semesters you were a full-time employee. 1040x for 2012 The denominator (bottom number) is the number of weeks, months, or semesters considered the normal annual work period for the position. 1040x for 2012   Figure the second fraction as though you had worked part-time for the entire annual work period. 1040x for 2012 The fraction is as follows: The numerator (top number) is the number of hours or days you worked. 1040x for 2012 The denominator (bottom number) is the number of hours or days normally required of someone holding the same position who works full-time. 1040x for 2012   Once you have figured these two fractions, multiply them together to determine the fraction representing your partial year of service for the year. 1040x for 2012 Example. 1040x for 2012 Maria, an attorney, teaches a course for one semester at a law school. 1040x for 2012 She teaches 3 hours per week. 1040x for 2012 The annual work period for teachers at the school is two semesters. 1040x for 2012 All full-time instructors at the school are required to teach 12 hours per week. 1040x for 2012 Based on these facts, Maria is employed part-time for part of the annual work period. 1040x for 2012 Her year of service for this year is determined by multiplying two fractions. 1040x for 2012 Her computation is as follows: Maria's first fraction Number of semesters Maria worked = 1 Number of semesters in annual work period 2 Maria's second fraction Number of hours Maria worked per week = 3 = 1 Number of hours per week considered full-time 12 4 Maria would multiply these fractions to obtain the fractional year of service: 1 x 1 = 1         2 4 8         Figuring the Limit on Elective Deferrals You can use Part II of Worksheet 1 in chapter 9 to figure the limit on elective deferrals. 1040x for 2012 Example Floyd has figured his limit on annual additions. 1040x for 2012 The only other component needed before he can determine his MAC for 2014 is his limit on elective deferrals. 1040x for 2012 Figuring Floyd's limit on elective deferrals. 1040x for 2012   Floyd has been employed with his current employer for less than 15 years. 1040x for 2012 He is not eligible for the special 15-year increase. 1040x for 2012 Therefore, his limit on elective deferrals for 2014 is $17,500 as shown in Table 4-2. 1040x for 2012 Floyd's employer will not make any nonelective contributions to his 403(b) account and Floyd will not make any after-tax contributions. 1040x for 2012 Additionally, Floyd's employer does not offer a Roth contribution program. 1040x for 2012 Figuring Floyd's MAC Floyd has determined that his limit on annual additions for 2014 is $52,000 and his limit on elective deferrals is $17,500. 1040x for 2012 Because elective deferrals are the only contributions made to Floyd's account, the maximum amount that can be contributed to a 403(b) account on Floyd's behalf in 2014 is $17,500, the lesser of both limits. 1040x for 2012 Table 4-2. 1040x for 2012 Worksheet 1. 1040x for 2012 Maximum Amount Contributable (MAC) Note. 1040x for 2012 Use this worksheet to figure your MAC. 1040x for 2012 Part I. 1040x for 2012 Limit on Annual Additions     1. 1040x for 2012 Enter your includible compensation for your most recent year of service 1. 1040x for 2012 $70,475 2. 1040x for 2012 Maximum: For 2013 enter $51,000 For 2014 enter $52,000 2. 1040x for 2012 52,000 3. 1040x for 2012 Enter the lesser of line 1 or line 2. 1040x for 2012 This is your limit on annual additions 3. 1040x for 2012 52,000   Caution: If you had only nonelective contributions, skip Part II and enter the amount from line 3 on line 18. 1040x for 2012     Part II. 1040x for 2012 Limit on Elective Deferrals     4. 1040x for 2012 Maximum contribution: For 2013, enter $17,500 For 2014, enter $17,500 4. 1040x for 2012 17,500   Note. 1040x for 2012 If you have at least 15 years of service with a qualifying organization, complete lines 5 through 17. 1040x for 2012 If not, enter zero (-0-) on line 16 and go to line 17. 1040x for 2012     5. 1040x for 2012 Amount per year of service 5. 1040x for 2012 5,000 6. 1040x for 2012 Enter your years of service 6. 1040x for 2012   7. 1040x for 2012 Multiply line 5 by line 6 7. 1040x for 2012   8. 1040x for 2012 Enter the total of all elective deferrals made for you by the qualifying organization for prior years 8. 1040x for 2012   9. 1040x for 2012 Subtract line 8 from line 7. 1040x for 2012 If zero or less, enter zero (-0-) 9. 1040x for 2012   10. 1040x for 2012 Maximum increase in limit for long service 10. 1040x for 2012 15,000 11. 1040x for 2012 Enter the total of additional pre-tax elective deferrals made in prior years under the 15-year rule 11. 1040x for 2012   12. 1040x for 2012 Enter the aggregate amount of all designated Roth contributions permitted for prior years under the 15-year rule 12. 1040x for 2012   13. 1040x for 2012 Add lines 11 and 12 13. 1040x for 2012   14. 1040x for 2012 Subtract line 13 from line 10 14. 1040x for 2012   15. 1040x for 2012 Maximum additional contributions 15. 1040x for 2012 3,000 16. 1040x for 2012 Enter the least of lines 9, 14, or 15. 1040x for 2012 This is your increase in the limit for long service 16. 1040x for 2012 -0- 17. 1040x for 2012 Add lines 4 and 16. 1040x for 2012 This is your limit on elective deferrals 17. 1040x for 2012 17,500   Part III. 1040x for 2012 Maximum Amount Contributable     18. 1040x for 2012 If you had only nonelective contributions, enter the amount from line 3. 1040x for 2012 This is your MAC. 1040x for 2012    If you had only elective deferrals, enter the lesser of lines 3 or 17. 1040x for 2012 This is your MAC. 1040x for 2012    If you had both elective deferrals and nonelective contributions, enter the amount from line 3. 1040x for 2012 This is your MAC. 1040x for 2012 (Use the amount on line 17 to determine if you have excess elective deferrals as explained in chapter 7. 1040x for 2012 ) 18. 1040x for 2012 $17,500 Prev  Up  Next   Home   More 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Understanding Your CP232C Notice

We denied your request to extend the time to file Form 5330 because your Form 5558, Application for Extension of Time To File Certain Employee Plan Returns, wasn't signed or was signed by someone who wasn’t authorized.


What you need to do

  • File Form 5330 or a correct Form 5558 by the due date of the Form 5330. If Form 5330 is filed after the due date of the return (including any extension), the return will be considered late and subject to late filing penalties.

You may want to


Answers to Common Questions

Q. Where can I go for more information about Employee Benefit Plans?

A. For more information on Employee Benefit Plans, see Retirement Plans Community.

Q. Can I get help over the phone?

A. If you have questions and/or need help, please call 1-877-829-5500. Personal assistance is available Monday through Friday, 7:00 a.m. to 7:00 p.m. CT.

 


Tips for next year

  • Be sure to sign and mail your Form 5558 on or before the due date of your return.
  • Review the Form 5558 resources at Form 5500 Corner.

 

Page Last Reviewed or Updated: 27-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
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The 1040x For 2012

1040x for 2012 9. 1040x for 2012   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. 1040x for 2012 Depletion unit. 1040x for 2012 Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. 1040x for 2012 The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. 1040x for 2012 There are two ways of figuring depletion: cost depletion and percentage depletion. 1040x for 2012 For mineral property, you generally must use the method that gives you the larger deduction. 1040x for 2012 For standing timber, you must use cost depletion. 1040x for 2012 Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. 1040x for 2012 More than one person can have an economic interest in the same mineral deposit or timber. 1040x for 2012 In the case of leased property, the depletion deduction is divided between the lessor and the lessee. 1040x for 2012 You have an economic interest if both the following apply. 1040x for 2012 You have acquired by investment any interest in mineral deposits or standing timber. 1040x for 2012 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. 1040x for 2012 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. 1040x for 2012 A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. 1040x for 2012 Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. 1040x for 2012 Basis adjustment for depletion. 1040x for 2012   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. 1040x for 2012 Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). 1040x for 2012 For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. 1040x for 2012 You can treat two or more separate interests as one property or as separate properties. 1040x for 2012 See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. 1040x for 2012 There are two ways of figuring depletion on mineral property. 1040x for 2012 Cost depletion. 1040x for 2012 Percentage depletion. 1040x for 2012 Generally, you must use the method that gives you the larger deduction. 1040x for 2012 However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. 1040x for 2012 See Oil and Gas Wells , later. 1040x for 2012 Cost Depletion To figure cost depletion you must first determine the following. 1040x for 2012 The property's basis for depletion. 1040x for 2012 The total recoverable units of mineral in the property's natural deposit. 1040x for 2012 The number of units of mineral sold during the tax year. 1040x for 2012 Basis for depletion. 1040x for 2012   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. 1040x for 2012 Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. 1040x for 2012 The residual value of land and improvements at the end of operations. 1040x for 2012 The cost or value of land acquired for purposes other than mineral production. 1040x for 2012 Adjusted basis. 1040x for 2012   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. 1040x for 2012 Your adjusted basis can never be less than zero. 1040x for 2012 See Publication 551, Basis of Assets, for more information on adjusted basis. 1040x for 2012 Total recoverable units. 1040x for 2012   The total recoverable units is the sum of the following. 1040x for 2012 The number of units of mineral remaining at the end of the year (including units recovered but not sold). 1040x for 2012 The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). 1040x for 2012   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. 1040x for 2012 You must include ores and minerals that are developed, in sight, blocked out, or assured. 1040x for 2012 You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. 1040x for 2012 But see Elective safe harbor for owners of oil and gas property , later. 1040x for 2012 Number of units sold. 1040x for 2012   You determine the number of units sold during the tax year based on your method of accounting. 1040x for 2012 Use the following table to make this determination. 1040x for 2012    IF you  use . 1040x for 2012 . 1040x for 2012 . 1040x for 2012 THEN the units sold during the year are . 1040x for 2012 . 1040x for 2012 . 1040x for 2012 The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). 1040x for 2012 An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. 1040x for 2012   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. 1040x for 2012 Figuring the cost depletion deduction. 1040x for 2012   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. 1040x for 2012 Step Action Result 1 Divide your property's basis for depletion by total recoverable units. 1040x for 2012 Rate per unit. 1040x for 2012 2 Multiply the rate per unit by units sold during the tax year. 1040x for 2012 Cost depletion deduction. 1040x for 2012 You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. 1040x for 2012 Elective safe harbor for owners of oil and gas property. 1040x for 2012   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. 1040x for 2012 If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). 1040x for 2012 For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. 1040x for 2012 irs. 1040x for 2012 gov/pub/irs-irbs/irb04-10. 1040x for 2012 pdf. 1040x for 2012   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. 1040x for 2012 The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. 1040x for 2012 The election, if made, is effective for the tax year in which it is made and all later years. 1040x for 2012 It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. 1040x for 2012 Once revoked, it cannot be re-elected for the next 5 years. 1040x for 2012 Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. 1040x for 2012 The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . 1040x for 2012 Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . 1040x for 2012 Gross income. 1040x for 2012   When figuring percentage depletion, subtract from your gross income from the property the following amounts. 1040x for 2012 Any rents or royalties you paid or incurred for the property. 1040x for 2012 The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. 1040x for 2012 A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. 1040x for 2012   Use the following fraction to figure the part of the bonus you must subtract. 1040x for 2012 No. 1040x for 2012 of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. 1040x for 2012 For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. 1040x for 2012 Taxable income limit. 1040x for 2012   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. 1040x for 2012   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. 1040x for 2012 These deductible items include, but are not limited to, the following. 1040x for 2012 Operating expenses. 1040x for 2012 Certain selling expenses. 1040x for 2012 Administrative and financial overhead. 1040x for 2012 Depreciation. 1040x for 2012 Intangible drilling and development costs. 1040x for 2012 Exploration and development expenditures. 1040x for 2012 Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. 1040x for 2012 Losses sustained. 1040x for 2012   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. 1040x for 2012 Do not deduct any net operating loss deduction from the gross income from the property. 1040x for 2012 Corporations do not deduct charitable contributions from the gross income from the property. 1040x for 2012 If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. 1040x for 2012 See section 1. 1040x for 2012 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. 1040x for 2012 Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. 1040x for 2012 You are either an independent producer or a royalty owner. 1040x for 2012 The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. 1040x for 2012 If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. 1040x for 2012 For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. 1040x for 2012 Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. 1040x for 2012 However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. 1040x for 2012 For information on figuring the deduction, see Figuring percentage depletion , later. 1040x for 2012 Refiners who cannot claim percentage depletion. 1040x for 2012   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. 1040x for 2012 The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. 1040x for 2012 Related person. 1040x for 2012   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. 1040x for 2012 For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. 1040x for 2012 A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. 1040x for 2012 For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. 1040x for 2012 The value of the outstanding stock of a corporation. 1040x for 2012 The interest in the profits or capital of a partnership. 1040x for 2012 The beneficial interests in an estate or trust. 1040x for 2012 Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. 1040x for 2012 Retailers who cannot claim percentage depletion. 1040x for 2012   You cannot claim percentage depletion if both the following apply. 1040x for 2012 You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. 1040x for 2012 Through a retail outlet operated by you or a related person. 1040x for 2012 To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. 1040x for 2012 To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. 1040x for 2012 The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. 1040x for 2012   For the purpose of determining if this rule applies, do not count the following. 1040x for 2012 Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. 1040x for 2012 Bulk sales of aviation fuels to the Department of Defense. 1040x for 2012 Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. 1040x for 2012 Related person. 1040x for 2012   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. 1040x for 2012 Sales through a related person. 1040x for 2012   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. 1040x for 2012   You are not considered to be selling through a related person who is a retailer if all the following apply. 1040x for 2012 You do not have a significant ownership interest in the retailer. 1040x for 2012 You sell your production to persons who are not related to either you or the retailer. 1040x for 2012 The retailer does not buy oil or natural gas from your customers or persons related to your customers. 1040x for 2012 There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. 1040x for 2012 Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. 1040x for 2012 Transferees who cannot claim percentage depletion. 1040x for 2012   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. 1040x for 2012 For a definition of the term “transfer,” see section 1. 1040x for 2012 613A-7(n) of the regulations. 1040x for 2012 For a definition of the term “interest in proven oil or gas property,” see section 1. 1040x for 2012 613A-7(p) of the regulations. 1040x for 2012 Figuring percentage depletion. 1040x for 2012   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. 1040x for 2012 If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. 1040x for 2012 If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. 1040x for 2012   In addition, there is a limit on the percentage depletion deduction. 1040x for 2012 See Taxable income limit , later. 1040x for 2012 Average daily production. 1040x for 2012   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. 1040x for 2012 Partial interest. 1040x for 2012   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. 1040x for 2012   You have a partial interest in the production from a property if you have a net profits interest in the property. 1040x for 2012 To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. 1040x for 2012 To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. 1040x for 2012 Then multiply the total production from the property by your percentage participation to figure your share of the production. 1040x for 2012 Example. 1040x for 2012 Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. 1040x for 2012 During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. 1040x for 2012 Javier had expenses of $90,000 attributable to the property. 1040x for 2012 The property generated a net profit of $110,000 ($200,000 − $90,000). 1040x for 2012 Pablo received income of $22,000 ($110,000 × . 1040x for 2012 20) for his net profits interest. 1040x for 2012 Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). 1040x for 2012 Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). 1040x for 2012 Depletable oil or natural gas quantity. 1040x for 2012   Generally, your depletable oil quantity is 1,000 barrels. 1040x for 2012 Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. 1040x for 2012 If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. 1040x for 2012 Example. 1040x for 2012 You have both oil and natural gas production. 1040x for 2012 To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. 1040x for 2012 Your depletable natural gas quantity is 2. 1040x for 2012 16 million cubic feet of gas (360 × 6000). 1040x for 2012 You must reduce your depletable oil quantity to 640 barrels (1000 − 360). 1040x for 2012 If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. 1040x for 2012 Also, see Notice 2012-50, available at www. 1040x for 2012 irs. 1040x for 2012 gov/irb/2012–31_IRB/index. 1040x for 2012 html. 1040x for 2012 Business entities and family members. 1040x for 2012   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. 1040x for 2012 Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). 1040x for 2012 You and your spouse and minor children. 1040x for 2012 A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. 1040x for 2012 Controlled group of corporations. 1040x for 2012   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. 1040x for 2012 They share the depletable quantity. 1040x for 2012 A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. 1040x for 2012 ” Gross income from the property. 1040x for 2012   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. 1040x for 2012 If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. 1040x for 2012   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. 1040x for 2012   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. 1040x for 2012 Average daily production exceeds depletable quantities. 1040x for 2012   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. 1040x for 2012 Figure your average daily production of oil or natural gas for the year. 1040x for 2012 Figure your depletable oil or natural gas quantity for the year. 1040x for 2012 Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. 1040x for 2012 Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). 1040x for 2012 This is your depletion allowance for that property for the year. 1040x for 2012 Taxable income limit. 1040x for 2012   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. 1040x for 2012 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. 1040x for 2012 For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. 1040x for 2012 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. 1040x for 2012 You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. 1040x for 2012 Add it to your depletion allowance (before applying any limits) for the following year. 1040x for 2012 Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. 1040x for 2012 (However, see Electing large partnerships must figure depletion allowance , later. 1040x for 2012 ) Each partner or shareholder must decide whether to use cost or percentage depletion. 1040x for 2012 If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. 1040x for 2012 Partner's or shareholder's adjusted basis. 1040x for 2012   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. 1040x for 2012 The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. 1040x for 2012   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. 1040x for 2012 However, in some cases, it is figured according to the partner's interest in partnership income. 1040x for 2012   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. 1040x for 2012 Recordkeeping. 1040x for 2012 Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. 1040x for 2012 The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. 1040x for 2012 The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. 1040x for 2012 Reporting the deduction. 1040x for 2012   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). 1040x for 2012 Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). 1040x for 2012 The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. 1040x for 2012 The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. 1040x for 2012 Form 6198, At-Risk Limitations. 1040x for 2012 Form 8582, Passive Activity Loss Limitations. 1040x for 2012 Electing large partnerships must figure depletion allowance. 1040x for 2012   An electing large partnership, rather than each partner, generally must figure the depletion allowance. 1040x for 2012 The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. 1040x for 2012 Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. 1040x for 2012   An electing large partnership is one that meets both the following requirements. 1040x for 2012 The partnership had 100 or more partners in the preceding year. 1040x for 2012 The partnership chooses to be an electing large partnership. 1040x for 2012 Disqualified persons. 1040x for 2012   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. 1040x for 2012 Disqualified persons must figure it themselves, as explained earlier. 1040x for 2012   All the following are disqualified persons. 1040x for 2012 Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). 1040x for 2012 Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). 1040x for 2012 Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. 1040x for 2012 Average daily production is discussed earlier. 1040x for 2012 Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. 1040x for 2012 Natural gas sold under a fixed contract. 1040x for 2012   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. 1040x for 2012 This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. 1040x for 2012 The contract must have been in effect from February 1, 1975, until the date of sale of the gas. 1040x for 2012 Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. 1040x for 2012 Natural gas from geopressured brine. 1040x for 2012   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. 1040x for 2012 This is natural gas that is both the following. 1040x for 2012 Produced from a well you began to drill after September 1978 and before 1984. 1040x for 2012 Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. 1040x for 2012 Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. 1040x for 2012 Mines and other natural deposits. 1040x for 2012   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. 1040x for 2012   The following is a list of the percentage depletion rates for the more common minerals. 1040x for 2012 DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. 1040x for 2012 Corporate deduction for iron ore and coal. 1040x for 2012   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). 1040x for 2012 Gross income from the property. 1040x for 2012   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. 1040x for 2012 Mining includes all the following. 1040x for 2012 Extracting ores or minerals from the ground. 1040x for 2012 Applying certain treatment processes described later. 1040x for 2012 Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. 1040x for 2012 Excise tax. 1040x for 2012   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. 1040x for 2012 Extraction. 1040x for 2012   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. 1040x for 2012 This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. 1040x for 2012 Treatment processes. 1040x for 2012   The processes included as mining depend on the ore or mineral mined. 1040x for 2012 To qualify as mining, the treatment processes must be applied by the mine owner or operator. 1040x for 2012 For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. 1040x for 2012 Transportation of more than 50 miles. 1040x for 2012   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. 1040x for 2012    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. 1040x for 2012 Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. 1040x for 2012 For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. 1040x for 2012 irs. 1040x for 2012 gov/irb/2013-01_IRB/ar11. 1040x for 2012 html. 1040x for 2012 Disposal of coal or iron ore. 1040x for 2012   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. 1040x for 2012 You disposed of it after holding it for more than 1 year. 1040x for 2012 You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. 1040x for 2012 Treat any gain on the disposition as a capital gain. 1040x for 2012 Disposal to related person. 1040x for 2012   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. 1040x for 2012 A related person (as listed in chapter 2 of Publication 544). 1040x for 2012 A person owned or controlled by the same interests that own or control you. 1040x for 2012 Geothermal deposits. 1040x for 2012   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. 1040x for 2012 A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. 1040x for 2012 For percentage depletion purposes, a geothermal deposit is not considered a gas well. 1040x for 2012   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. 1040x for 2012 See Gross income from the property , earlier, under Oil and Gas Wells. 1040x for 2012 Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. 1040x for 2012 Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. 1040x for 2012 A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. 1040x for 2012 Bonuses and advanced royalties. 1040x for 2012   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. 1040x for 2012 If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. 1040x for 2012 Figuring cost depletion. 1040x for 2012   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. 1040x for 2012 To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. 1040x for 2012 Figuring percentage depletion. 1040x for 2012   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . 1040x for 2012 Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. 1040x for 2012 However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. 1040x for 2012 Ending the lease. 1040x for 2012   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. 1040x for 2012 Do this for the year the lease ends or is abandoned. 1040x for 2012 Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. 1040x for 2012   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. 1040x for 2012 Include this amount in income for the year the lease ends. 1040x for 2012 Increase your adjusted basis in the property by the amount you include in income. 1040x for 2012 Delay rentals. 1040x for 2012   These are payments for deferring development of the property. 1040x for 2012 Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. 1040x for 2012 These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. 1040x for 2012 Timber You can figure timber depletion only by the cost method. 1040x for 2012 Percentage depletion does not apply to timber. 1040x for 2012 Base your depletion on your cost or other basis in the timber. 1040x for 2012 Your cost does not include the cost of land or any amounts recoverable through depreciation. 1040x for 2012 Depletion takes place when you cut standing timber. 1040x for 2012 You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. 1040x for 2012 Figuring cost depletion. 1040x for 2012   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. 1040x for 2012 Timber units. 1040x for 2012   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. 1040x for 2012 You measure the timber using board feet, log scale, cords, or other units. 1040x for 2012 If you later determine that you have more or less units of timber, you must adjust the original estimate. 1040x for 2012   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. 1040x for 2012 Depletion unit. 1040x for 2012   You figure your depletion unit each year by taking the following steps. 1040x for 2012 Determine your cost or adjusted basis of the timber on hand at the beginning of the year. 1040x for 2012 Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. 1040x for 2012 Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. 1040x for 2012 Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. 1040x for 2012 Divide the result of (2) by the result of (3). 1040x for 2012 This is your depletion unit. 1040x for 2012 Example. 1040x for 2012 You bought a timber tract for $160,000 and the land was worth as much as the timber. 1040x for 2012 Your basis for the timber is $80,000. 1040x for 2012 Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). 1040x for 2012 If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). 1040x for 2012 When to claim depletion. 1040x for 2012   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). 1040x for 2012 Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. 1040x for 2012 The inventory is your basis for determining gain or loss in the tax year you sell the timber products. 1040x for 2012 Example. 1040x for 2012 The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. 1040x for 2012 You would deduct $20,000 of the $40,000 depletion that year. 1040x for 2012 You would add the remaining $20,000 depletion to your closing inventory of timber products. 1040x for 2012 Electing to treat the cutting of timber as a sale or exchange. 1040x for 2012   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. 1040x for 2012 You must make the election on your income tax return for the tax year to which it applies. 1040x for 2012 If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. 1040x for 2012 You generally report the gain as long-term capital gain. 1040x for 2012 The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. 1040x for 2012 For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. 1040x for 2012   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. 1040x for 2012 The prior election (and revocation) is disregarded for purposes of making a subsequent election. 1040x for 2012 See Form T (Timber), Forest Activities Schedule, for more information. 1040x for 2012 Form T. 1040x for 2012   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. 1040x for 2012 Prev  Up  Next   Home   More Online Publications