Depletion Depletion is the using up of natural resources by mining,quarrying, drilling, or felling. The depletion deduction allows anowner or operator to account for the reduction of a product'sreserves. Who Can Claim Depletion If you have an economic interest in mineral property or standingtimber, you can take a deduction for depletion. More than one personcan have an economic interest in the same mineral deposit or timber. You have an economic interest if both of the following apply. You have acquired by investment a legal interest in mineraldeposits or standing timber. You have the right to income from the extraction of themineral or the cutting of the timber to which you must look for areturn of your capital investment. A contractual relationship you have that allows you an economicor monetary advantage from products of the mineral deposit or standingtimber is not, in itself, an economic interest. A production paymentcarved out of, or retained on the sale of, mineral property is not aneconomic interest. The term "mineral property" means each separate interest youown in each mineral deposit in each separate tract or parcel of land.You can treat mineral properties separately or as a group. See section614 of the Internal Revenue Code for rules on how to treat separateproperties. The term "timber property" means your economic interest instanding timber in each tract or block representing a separate timberaccount. Figuring Depletion There are two ways of figuring depletion. Cost depletion. Percentage depletion. For mineral property, you generally must use the method thatgives you the larger deduction. For standing timber, you must use costdepletion. Cost Depletion To figure cost depletion you must first determine the following. The property's basis for depletion. The total recoverable units in the property's naturaldeposit. The number of units sold during the tax year. You must estimate or determine recoverable units (tons, barrels,board feet, or other measure) using the current industry method andthe most accurate and reliable information you can obtain. Basis for depletion and recoverable units are explained in chapter 13 of Publication 535. Number of units sold.The number of units sold during the tax year is one of thefollowing. The units sold based on your inventories, during the taxyear, if you use the accrual method of accounting. The units sold for which you receive payment, during theyear (regardless of the year of sale), if you use the cash method ofaccounting. The number of units sold during the tax year does not include anyunits on which depletion deductions were allowed or allowable inearlier years. Figuring the cost depletion deduction.Once you have figured your property's basis for depletion, thetotal recoverable units, and the number of units sold during the taxyear, you can figure your cost depletion deduction by taking thefollowing steps. Step Action Result 1 hoteles OportoDivide your property'sbasis for depletion bytotal recoverable units. ERROR MSGRate per unit. 2 Multiply the rate perunit by units soldduring the tax year. Cost depletion deduction. cheap hotel in BlackpoolCost depletion on ground water of Ogallala Formation.Farmers who extract ground water from the Ogallala Formation forirrigation are allowed cost depletion. Cost depletion is allowed whenit can be demonstrated the ground water is being depleted and the rateof recharge is so low that, once extracted, the water is lost to thetaxpayer and immediately succeeding generations. To figure your cost depletion deduction, use the guidance providedin Revenue Procedure 66-11 in Cumulative Bulletin 1966-1. For tax years ending before December 13, 1982, those extractingground water for irrigation farming from areas in the OgallalaFormation outside the Southern High Plains were not required to reducetheir basis in ground water by any allowable cost depletion that wasnot claimed. Timber depletion.You can take depletion on timber (including Christmas trees) onlyif you cut it yourself or have it cut for you. To figure timberdepletion, you multiply the number of units of standing timber cut byyour depletion unit. Timber units.When you acquire timber property, you must make an estimate of thequantity of marketable timber that exists on the property. You measurethe timber using board feet, log scale, cords, or other units. If youlater determine that you have more or less units of timber, you mustadjust the original estimate. Depletion units.You figure your depletion unit each year by taking the followingsteps. Determine your cost or the adjusted basis of the timber onhand at the beginning of the year. Add to the amount determined in (1) the cost of any unitsacquired during the year and any additions to capital. Figure the number of units to take into account by addingthe units acquired during the year to the units on hand in the accountat the beginning of the year and then adding (or subtracting) anycorrection to the estimate of the units remaining in theaccount. Divide the result of (2) by the result of (3). This is yourdepletion unit. When to claim timber depletion.Claim your depletion allowance as a deduction in the year of saleor other disposition of the products cut from the timber, unless youelect to treat the cutting of timber as a sale or exchange asexplained in chapter 10.Include allowable depletion for timberproducts not sold during the tax year the timber is cut as a cost itemin the closing inventory of timber products for the year. Theinventory is your basis for determining gain or loss in the tax yearthat you sell the timber products. Form T.Attach Form T to your income tax return if you are claiming adeduction for timber depletion or electing to treat the cutting oftimber as a sale or exchange. Example.Sam Brown bought a farm that included standing timber. This yearSam determined that the standing timber could produce 300,000 unitswhen cut. At that time, the adjusted basis of the standing timber was$24,000. Sam then cut and sold 27,000 units. Sam did not elect totreat the cutting of the timber as a sale or exchange. Sam's depletionfor each unit for the year is $.08 ($24,000 300,000). Hisdeduction for depletion is $2,160 (27,000 $.08). If Sam hadcut 27,000 units but sold only 20,000 units during the year, hisdepletion for each unit would have remained at $.08. However, hisdepletion deduction would have been $1,600 for this year and he wouldhave included the balance of $560 (7,000 $.08) in the closinginventory for the year. Percentage Depletion You can use percentage depletion on certain mines, wells, and othernatural deposits. You cannot use the percentage method to figuredepletion for standing timber, soil, sod, dirt, or turf. billig hotel WaterfordFigure percentage depletion by multiplying the percentage for eachmineral by your gross income from the property during the year. SeeMines and other natural deposits in chapter 13 ofPublication 535for a list of the percentages. Taxable income limit.The percentage depletion deduction cannot be more than 50%(100% for oil and gas property) of your taxable income from theproperty figured without the depletion deduction. This taxable incomelimit may not apply to percentage depletion on the marginal productionof oil or natural gas. For information on marginal production, seesection 613A(c)(6) of the Internal Revenue Code. The following rules apply when figuring your taxable income fromthe property for purposes of the taxable income limit. Do not deduct any net operating loss deduction from thegross income from the property. Corporations do not deduct charitable contributions from thegross income from the property. If, during the year, you disposed of an item of section 1245property which was used in connection with the mineral property,reduce any allowable deduction for mining expenses by the part of anygain you must report as ordinary income that is allocable to theproperty. See section 1.613-5(b)(1) of the regulations forinformation on how to figure the ordinary gain allocable to theproperty. More Information For more information on depletion, see chapter 13 in Publication 535.