Professional Documents
Culture Documents
Business
Introduction . . . . . . . . . . . . . . . . . . 1
Department
of the What's New for 2015 . . . . . . . . . . . . . 2
Expenses
Treasury
Internal What's New for 2016 . . . . . . . . . . . . . 2
Revenue
Service Reminders . . . . . . . . . . . . . . . . . . . 2
2015 Returns
Chapter 2. Employees' Pay . . . . . . . . 6
Chapter 4. Interest . . . . . . . . . . . . 11
Chapter 5. Taxes . . . . . . . . . . . . . 16
Chapter 6. Insurance . . . . . . . . . . . 18
Chapter 8. Amortization . . . . . . . . . 26
Chapter 9. Depletion . . . . . . . . . . . 33
Index . . . . . . . . . . . . . . . . . . . . . 52
Introduction
This publication discusses common business
expenses and explains what is and is not de
ductible. The general rules for deducting busi
ness expenses are discussed in the opening
chapter. The chapters that follow cover specific
expenses and list other publications and forms
you may need.
You can file your tax returns electronically See chapter 12 for information about getting
using an IRS e-file option. The benefits of IRS publications and forms.
Category 1. Deductions you can take for per Available for Category 3 . . . . . . . . . . $ 300
Introduction
sonal as well as for business activities are al
lowed in full. For individuals, all nonbusiness The $800 of depreciation is allocated be You can generally deduct the amount you pay
deductions, such as those for home mortgage tween the automobile and machine as follows. your employees for the services they perform.
interest, taxes, and casualty losses, belong in The pay may be in cash, property, or services. It
$600 depreciation for the may include wages, salaries, bonuses, commis
this category. Deduct them on the appropriate $800
x $300 = $225
automobile
lines of Schedule A (Form 1040). sions, or other noncash compensation such as
You can deduct a casualty loss on property vacation allowances and fringe benefits. For in
you own for personal use only to the extent
$200
x $300 = $75
depreciation for the formation about deducting employment taxes,
$800 machine see chapter 5.
each casualty loss is more than $100, and the
total of all casualty losses exceeds 10% of your The basis of each asset is reduced accord You can claim employment credits,
adjusted gross income (AGI). See Pub. 547 for ingly. TIP such as the following, if you hire indi-
more information on casualty losses. Adriana includes the $3,200 of gross in viduals who meet certain require-
For the limits that apply to home mortgage come on line 21 (other income) of Form 1040. ments.
interest, see Pub. 936. The $1,600 for category (1) is deductible in full Empowerment zone employment credit
on the appropriate lines for taxes and interest (Form 8844).
Category 2. Deductions that do not result in an on Schedule A (Form 1040). Adriana deducts Indian employment credit (Form 8845).
adjustment to the basis of property are allowed the remaining $1,600 ($1,300 for category (2) Work opportunity credit (Form 5884).
next, but only to the extent your gross income and $300 for category (3)) as other miscellane
from the activity is more than your deductions ous deductions on Schedule A (Form 1040) Credit for employer differential wage pay-
under the first category. Most business deduc subject to the 2%ofadjustedgrossincome ments (Form 8932).
tions, such as those for advertising, insurance limit.
premiums, interest, utilities, and wages, belong Reduce your deduction for employee wages by
in this category. Partnerships and S corporations. If a part the amount of employment credits you claim.
nership or S corporation carries on a For more information about these credits, see
Category 3. Business deductions that de notforprofit activity, these limits apply at the the form on which the credit is claimed.
crease the basis of property are allowed last, partnership or S corporation level. They are re
but only to the extent the gross income from the flected in the individual shareholder's or part Topics
activity exceeds the deductions you take under ner's distributive shares. This chapter discusses:
the first two categories. Deductions for depreci
ation, amortization, and the part of a casualty More than one activity. If you have several Tests for deducting pay
loss an individual could not deduct in category undertakings, each may be a separate activity
(1) belong in this category. Where more than or several undertakings may be combined. The Kinds of pay
one asset is involved, allocate depreciation and following are the most significant facts and cir
these other deductions proportionally. cumstances in making this determination. Useful Items
The degree of organizational and eco You may want to see:
Individuals must claim the amounts in
nomic interrelationship of various under
TIP categories (2) and (3) as miscellane- takings.
ous deductions on Schedule A (Form Publication
The business purpose that is (or might be)
1040). They are subject to the 2%-of-adjus-
served by carrying on the various under 15 Employer's Tax Guide
ted-gross-income limit. See Pub. 529 for infor-
takings separately or together in a busi
mation on this limit. 15-A Employer's Supplemental Tax Guide
ness or investment setting.
The similarity of the undertakings. 15-B Employer's Tax Guide to Fringe
Example. Adriana is engaged in a Benefits
notforprofit activity. The income and expenses The IRS will generally accept your charac
of the activity are as follows. terization if it is supported by facts and circum See chapter 12 for information about getting
stances. publications and forms.
Test 2For Services Deduction limit. Your deduction for the Fringe Benefits
cost of employee achievement awards given to
Performed any one employee during the tax year is limited A fringe benefit is a form of pay for the perform
to the following. ance of services. You can generally deduct the
You must be able to prove the payment was cost of fringe benefits.
$400 for awards that aren't qualified plan
made for services actually performed.
awards.
$1,600 for all awards, whether or not quali You may be able to exclude all or part of the
Employee-shareholder salaries. If a corpo value of some fringe benefits from your employ
fied plan awards.
ration pays an employee who is also a share ees' pay. You also may not owe employment
holder a salary that is unreasonably high con A qualified plan award is an achievement taxes on the value of the fringe benefits. See
sidering the services actually performed, the award given as part of an established written Table 21 in Pub. 15B for details.
excessive part of the salary may be treated as a plan or program that doesn't favor highly com
constructive dividend to the employeeshare pensated employees as to eligibility or benefits. Your deduction for the cost of fringe benefits
holder. The excessive part of the salary A highly compensated employee is an em for activities generally considered entertain
wouldn't be allowed as a salary deduction by ployee who meets either of the following tests. ment, amusement, or recreation, or for a facility
the corporation. For more information on corpo used in connection with such an activity (for ex
1. The employee was a 5% owner at any ample, a company aircraft) for certain officers,
rate distributions to shareholders, see Pub. 542. time during the year or the preceding year. directors, and morethan10% shareholders is
2. The employee received more than limited.
$115,000 in pay for 2014.
Certain fringe benefits are discussed next.
See Pub. 15B for more details on these and
other fringe benefits.
4. Investment interest.
passive activity and $80,000 of the loan as
property held for investment. From September
Portfolio interest. 4 through December 31, she must treat
Personal interest. $40,000 of the loan as used for personal purpo
Interest In general, you allocate interest on a loan the
ses, $20,000 as used in the passive activity,
and $40,000 as property held for investment.
same way you allocate the loan proceeds. You
allocate loan proceeds by tracing disburse Order of funds spent. Generally, you treat
loan proceeds deposited in an account as used
Introduction ments to specific uses.
(spent) before either of the following amounts.
The easiest way to trace disburse- Any unborrowed amounts held in the same
This chapter discusses the tax treatment of
TIP ments to specific uses is to keep the account.
business interest expense. Business interest
proceeds of a particular loan separate Any amounts deposited after these loan
expense is an amount charged for the use of
from any other funds. proceeds.
money you borrowed for business activities.
Secured loan. The allocation of loan proceeds Example. On January 9, Olena opened a
Topics checking account, depositing $500 of the pro
This chapter discusses: and the related interest is not generally affected
by the use of property that secures the loan. ceeds of Loan A and $1,000 of unborrowed
funds. The following table shows the transac
Allocation of interest Example. You secure a loan with property tions in her account during the tax year.
Interest you can deduct used in your business. You use the loan pro
Interest you cannot deduct ceeds to buy an automobile for personal use.
You must allocate interest expense on the loan
Capitalization of interest to personal use (purchase of the automobile)
When to deduct interest even though the loan is secured by business
Belowmarket loans property.
If the property that secures the loan is
Useful Items TIP your home, you generally do not allo-
You may want to see: cate the loan proceeds or the related
interest. The interest is usually deductible as
qualified home mortgage interest, regardless of
Publication
how the loan proceeds are used. For more in-
537 Installment Sales formation, see Pub. 936.
Separate elections. You can elect to rata The filing of an income tax return is not Unemployment fund taxes. As an employer,
bly accrue the taxes for each separate trade or TIP considered a contest and, in the ab- you may have to make payments to a state un
business and for nonbusiness activities if you sence of an overt act of protest, you employment compensation fund or to a state
account for them separately. Once you elect to can deduct the tax in the prior year. Also, you disability benefit fund. Deduct these payments
ratably accrue real estate taxes, you must use can deduct any additional taxes in the prior year as taxes.
that method unless you get permission from the if you do not show some affirmative evidence of
IRS to change. See Form 3115, later. denial of the liability. Self-employment tax. You can deduct part of
your selfemployment tax as a business ex
Making the election. If you elect to ratably However, if you consistently deduct addi pense in figuring your adjusted gross income.
accrue the taxes for the first year in which you tional assessments in the year they are paid or This deduction only affects your income tax. It
incur real estate taxes, attach a statement to finally determined (including those for which does not affect your net earnings from selfem
your income tax return for that year. The state there was no contest), you must continue to do ployment or your selfemployment tax.
ment should show all the following items. so. You cannot take a deduction in the earlier To deduct the tax, enter on Form 1040,
The trades or businesses to which the year unless you receive permission to change line 27, the amount shown on the Deduction for
election applies and the accounting your method of accounting. For more informa onehalf of selfemployment tax line of Sched
method or methods used. tion on accounting methods, see When Can I ule SE (Form 1040).
The period to which the taxes relate. Deduct an Expense in chapter 1. For more information on selfemployment
The computation of the real estate tax de tax, see Publication 334.
duction for that first year. Foreign income taxes. Generally, you can Additional Medicare Tax. You may be re
take either a deduction or a credit for income quired to pay Additional Medicare Tax on
Generally, you must file your return by the taxes imposed on you by a foreign country or a selfemployment income. See Form 8959 and
due date (including extensions). However, if U.S. possession. However, an individual cannot the Instructions for Form 8959 for more informa
you timely filed your return for the year without take a deduction or credit for foreign income tion on the Additional Medicare Tax.
electing to ratably accrue, you can still make the taxes paid on income that is exempt from U.S.
election by filing an amended return within 6 tax under the foreign earned income exclusion
months after the due date of the return (exclud
ing extensions). Attach the statement to the
or the foreign housing exclusion. For informa
tion on these exclusions, see Publication 54,
Other Taxes
amended return and write Filed pursuant to Tax Guide for U.S. Citizens and Resident Aliens
section 301.91002 on the statement. File the The following are other taxes you can deduct if
Abroad. For information on the foreign tax you incur them in the ordinary course of your
amended return at the same address where you credit, see Publication 514, Foreign Tax Credit
filed the original return. trade or business.
for Individuals.
Form 3115. If you elect to ratably accrue Excise taxes. Generally, you can deduct as a
real estate taxes for a year after the first year in business expense all excise taxes that are ordi
which you incur real estate taxes, or if you want Employment Taxes nary and necessary expenses of carrying on
to revoke your election to ratably accrue real your trade or business. However, see Fuel
estate taxes, file Form 3115. For more informa If you have employees, you must withhold vari taxes, later.
tion, including applicable time frames for filing, ous taxes from your employees' pay. Most em For more information on excise taxes, see
see the Instructions for Form 3115. ployers must withhold their employees' share of Publication 510.
social security, Medicare taxes, and Additional
Medicare Tax (if applicable) along with state Franchise taxes. You can deduct corporate
Income Taxes and federal income taxes. You may also need franchise taxes as a business expense.
to pay certain employment taxes from your own
This section discusses federal, state, local, and funds. These include your share of social secur Fuel taxes. Generally, taxes on gasoline, die
foreign income taxes. ity and Medicare taxes as an employer, along sel fuel, and other motor fuels that you use in
with unemployment taxes. your business are included as part of the cost of
Chronically ill individual. A chronically ill (general mobility), bathing, dressing, and Benefits received. For information on ex
individual is a person who has been certified as continence. cluding benefits you receive from a longterm
one of the following. An individual who requires substantial su care contract from gross income, see Publica
An individual who has been unable, due to pervision to be protected from threats to tion 525.
loss of functional capacity for at least 90 health and safety due to severe cognitive
days, to perform at least two activities of impairment. Other coverage. You cannot take the deduc
daily living without substantial assistance tion for any month you were eligible to partici
The certification must have been made by a li
from another individual. Activities of daily pate in any employer (including your spouse's)
censed health care practitioner within the previ
living are eating, toileting, transferring subsidized health plan at any time during that
ous 12 months.
drilling, exploration, development, circulation, or How to make the election. To make the elec
allocable to a period of time. You can deduct in
business organizational costs. tion to capitalize a carrying charge, attach a
surance expenses for the year to which they are
allocable. statement to your original tax return for the year
For more information on the alternative mini- the election is to be effective indicating which
Example. In 2015, you signed a 3year in mum tax, see the instructions for the following charges you are electing to capitalize. However,
surance contract. Even though you paid the forms. if you timely filed your return for the year without
premiums for 2015, 2016, and 2017 when you Form 6251, Alternative Minimum TaxIn- making the election, you can still make the elec
signed the contract, you can only deduct the dividuals. tion by filing an amended return within 6 months
premium for 2015 on your 2015 tax return. You Form 4626, Alternative Minimum of the due date of the return (excluding exten
can deduct in 2016 and 2017 the premium allo TaxCorporations. sions). Attach the statement to the amended re
cable to those years. turn and write Filed pursuant to section
Topics 301.91002 on the statement. File the amen
Dividends received. If you receive dividends This chapter discusses: ded return at the same address you filed the
from business insurance and you deducted the original return.
premiums in prior years, at least part of the divi Carrying charges
dends generally are income. For more informa
tion, see Recovery of amount deducted (tax Research and experimental costs
Research and
benefit rule) in chapter 1 under How Much Can I Intangible drilling costs
Deduct. Exploration costs Experimental Costs
Development costs
The costs of research and experimentation are
Circulation costs generally capital expenses. However, you can
Business startup and organizational costs elect to deduct these costs as a current busi
ness expense. Your election to deduct these
Reforestation costs
costs is binding for the year it is made and for
7. Retired asset removal costs
Barrier removal costs
all later years unless you get IRS approval to
make a change.
Film and television production costs
If you meet certain requirements, you may
Costs You Repair and maintenance costs elect to defer and amortize research and exper
imental costs. For information on electing to de
Can Deduct Useful Items
You may want to see:
fer and amortize these costs, see Research and
Experimental Costs in chapter 8.
or Capitalize Publication
Research and experimental costs defined.
Research and experimental costs are reasona
544 Sales and Other Dispositions of ble costs you incur in your trade or business for
Assets activities intended to provide information that
What's New would eliminate uncertainty about the develop
Form (and Instructions) ment or improvement of a product. Uncertainty
Film and television production costs. The exists if the information available to you does
3468 Investment Credit not establish how to develop or improve a prod
election to expense qualified film and television
production costs apply to certain costs of quali 8826 Disabled Access Credit uct or the appropriate design of a product.
fied film, television, and live theatrical produc Whether costs qualify as research and experi
tions commencing before January 1, 2017 (after See chapter 12 for information about getting mental costs depends on the nature of the ac
December 31, 2015, and before January 1, publications and forms. tivity to which the costs relate rather than on the
2017, for live theatrical productions). See Film nature of the product or improvement being de
and Television Production Costs, later. veloped or the level of technological advance
Carrying Charges ment.
The costs of obtaining a patent, including at
Introduction Carrying charges include the taxes and interest torneys' fees paid or incurred in making and
you pay to carry or develop real property or to perfecting a patent application, are research
This chapter discusses costs you can elect to carry, transport, or install personal property. and experimental costs. However, costs paid or
deduct or capitalize. Certain carrying charges must be capitalized incurred to obtain another's patent are not re
You generally deduct a cost as a current under the uniform capitalization rules. (For infor search and experimental costs.
business expense by subtracting it from your in mation on capitalization of interest, see chap
come in either the year you incur it or the year Product. The term product includes any
ter 4.) You can elect to capitalize carrying
you pay it. of the following items.
charges not subject to the uniform capitalization
If you capitalize a cost, you may be able to Formula.
rules, but only if they are otherwise deductible.
recover it over a period of years through peri Invention.
odic deductions for amortization, depletion, or You can elect to capitalize carrying charges
Patent.
depreciation. When you capitalize a cost, you separately for each project you have and for
add it to the basis of property to which it relates. each type of carrying charge. Your election is Pilot model.
A partnership, corporation, estate, or trust good for only 1 year for unimproved and unpro Process.
makes the election to deduct or capitalize the ductive real property. You must decide whether Technique.
costs discussed in this chapter except for ex to capitalize carrying charges each year the
ploration costs for mineral deposits. Each property remains unimproved and Property similar to the items listed above.
turn on which you elected to amortize your nificant change in ownership or use. See
tions sections 1.1951, 1.2481, and 1.7091,
startup costs. AntiChurning Rules, later.
you must also attach an accompanying state
ment to elect to amortize the costs.
Organizational costs election statement. If Your amortization deduction each year is
you elect to amortize your corporation's or part the applicable part of the intangible's adjusted
If you have both startup and organizational
nership's organizational costs, attach a sepa basis (for purposes of determining gain), fig
costs, attach a separate statement (if required)
rate statement (if required) that contains the fol ured by amortizing it ratably over 15 years (180
to your return for each type of cost. See Starting
lowing information. months). The 15year period begins with the
a Business, earlier, for more information.
A description of each cost. later of:
The month the intangible is acquired, or
Generally, you must file the return by the The amount of each cost.
due date (including any extensions). However, The month the trade or business or activity
The date each cost was incurred.
if you timely filed your return for the year without engaged in for the production of income
making the election, you can still make the elec The month your corporation or partnership begins.
tion by filing an amended return within 6 months began active business (or acquired the
You cannot deduct amortization for the month
of the due date of the return (excluding exten business).
you dispose of the intangible.
sions). For more information, see the instruc The number of months in your amortization
tions for Part VI of Form 4562. period (which is generally 180 months). If you pay or incur an amount that increases
Partnerships. The statement prepared for the basis of an amortizable section 197 intangi
You can choose to forgo the election to am a cash basis partnership must also indicate the ble after the 15year period begins, amortize it
ortize by affirmatively electing to capitalize your amount paid before the end of the year for each over the remainder of the 15year period begin
startup or organizational costs on your income cost. ning with the month the basis increase occurs.
tax return filed by the due date (including exten You do not need to separately list any part
sions) for the tax year in which the active trade You are not allowed any other depreciation
nership organizational cost that is less than or amortization deduction for an amortizable
or business begins. $10. Instead, you can list the total amount of section 197 intangible.
these costs with the dates the first and last
Note. The election to either amortize or
costs were incurred. Tax-exempt use property subject to a lease.
capitalize startup or organizational costs is ir
After a partnership makes the election to The amortization period for any section 197 in
revocable and applies to all startup and organi
amortize organizational costs, it can later file an tangible leased under a lease agreement en
zational costs that are related to the trade or
amended return to include additional organiza tered into after March 12, 2004, to a taxexempt
business.
tional costs not included in the partnership's organization, governmental unit, or foreign per
original return and statement. son or entity (other than a partnership), shall not
If your business is organized as a corpora
tion or partnership, only the corporation or part be less than 125 percent of the lease term.
nership can elect to amortize its startup or or
ganizational costs. A shareholder or partner Getting a Lease Cost attributable to other property. The
cannot make this election. You, as a share rules for section 197 intangibles do not apply to
holder or partner, cannot amortize any costs If you get a lease for business property, you any amount that is included in determining the
you incur in setting up your corporation or part may recover the cost of acquiring the lease by cost of property that is not a section 197 intangi
nership. Only the corporation or partnership can amortizing it over the term of the lease. The ble. For example, if the cost of computer soft
amortize these costs. term of the lease for amortization purposes gen ware is not separately stated from the cost of
erally includes all renewal options (and any hardware or other tangible property and you
However, you, as an individual, can elect to other period for which you and the lessor rea consistently treat it as part of the cost of the
amortize costs you incur to investigate an inter sonably expect the lease to be renewed). How hardware or other tangible property, these rules
est in an existing partnership. These costs qual ever, renewal periods are not included if 75% or do not apply. Similarly, none of the cost of ac
ify as business startup costs if you acquire the more of the cost of acquiring the lease is for the quiring real property held for the production of
partnership interest. term of the lease remaining on the acquisition rental income is considered the cost of good
date (not including any period for which you will, going concern value, or any other section
Start-up costs election statement. If you may choose to renew, extend, or continue the 197 intangible.
elect to amortize your startup costs, attach a lease).
separate statement (if required) that contains Section 197 Intangibles
For more information on the costs of getting
the following information.
A description of the business to which the a lease, see Cost of Getting a Lease in
Defined
startup costs relate. chapter 3.
The following assets are section 197 intangibles
A description of each startup cost incur
How to amortize. Enter your deduction in Part and must be amortized over 180 months:
red.
The month your active business began (or VI of Form 4562 if you are deducting amortiza 1. Goodwill;
was acquired). tion that begins during the current year, or on
the appropriate line of your tax return if you are 2. Going concern value;
The number of months in your amortization
period (which is generally 180 months). not otherwise required to file Form 4562. 3. Workforce in place;
tax. covered but not sold). made and all later years. It cannot be revoked
The number of units of mineral sold during for the tax year in which it is elected, but may be
Basis adjustment for depletion. You must the tax year (determined under your revoked in a later year. Once revoked, it cannot
reduce the basis of your property by the deple method of accounting, as explained next). be reelected for the next 5 years.
tion allowed or allowable, whichever is greater. You must estimate or determine recoverable
units (tons, pounds, ounces, barrels, thousands Percentage Depletion
of cubic feet, or other measure) of mineral prod
Mineral Property ucts using the current industry method and the
To figure percentage depletion, you multiply a
most accurate and reliable information you can
certain percentage, specified for each mineral,
Mineral property includes oil and gas wells, obtain. You must include ores and minerals that
by your gross income from the property during
mines, and other natural deposits (including ge are developed, in sight, blocked out, or as
the tax year.
othermal deposits). For this purpose, the term sured. You must also include probable or pro
property means each separate interest you spective ores or minerals that are believed to The rates to be used and other rules for oil
own in each mineral deposit in each separate exist based on good evidence. But see Elective and gas wells are discussed later under Inde-
tract or parcel of land. You can treat two or safe harbor for owners of oil and gas property, pendent Producers and Royalty Owners and
more separate interests as one property or as later. under Natural Gas Wells. Rates and other rules
separate properties. See section 614 of the In for percentage depletion of other specific miner
ternal Revenue Code and the related regula Number of units sold. You determine the als are found later in Mines and Geothermal De-
tions for rules on how to treat separate mineral number of units sold during the tax year based posits.
interests. on your method of accounting. Use the follow
ing table to make this determination. Gross income. When figuring percentage de
There are two ways of figuring depletion on pletion, subtract from your gross income from
mineral property. IF you THEN the units sold during the property the following amounts.
Cost depletion. use ... the year are ... Any rents or royalties you paid or incurred
Percentage depletion. for the property.
The cash The units sold for which you
method of receive payment during the tax The part of any bonus you paid for a lease
Generally, you must use the method that gives accounting year (regardless of the year of on the property allocable to the product
you the larger deduction. However, unless you sale). sold (or that otherwise gives rise to gross
are an independent producer or royalty owner, An accrual The units sold based on your
income) for the tax year.
you generally cannot use percentage depletion method of inventories and method of A bonus payment includes amounts you paid as
for oil and gas wells. See Oil and Gas Wells, accounting accounting for inventory. a lessee to satisfy a production payment re
later. tained by the lessor.
The number of units sold during the tax year
Use the following fraction to figure the part
does not include any for which depletion deduc
Cost Depletion tions were allowed or allowable in earlier years.
of the bonus you must subtract.
To figure cost depletion you must first deter Figuring the cost depletion deduction. No. of units sold in the tax year Bonus
mine the following. Once you have figured your property's basis for Recoverable units from the property Payments
The property's basis for depletion. depletion, the total recoverable units, and the
For oil and gas wells and geothermal depos
The total recoverable units of mineral in the number of units sold during the tax year, you
its, more information about the definition of
property's natural deposit. can figure your cost depletion deduction by tak
gross income from the property is under Oil and
The number of units of mineral sold during ing the following steps.
Gas Wells, later. For other property, more infor
the tax year.
mation about the definition of gross income
Basis for depletion. To figure the property's Step Action Result from the property is under Mines and Geother-
basis for depletion, subtract all the following 1 Divide your property's Rate per unit. mal Deposits, later.
from the property's adjusted basis. basis for depletion by
total recoverable units. Taxable income limit. The percentage deple
1. Amounts recoverable through: tion deduction generally cannot be more than
2 Multiply the rate per Cost depletion
a. Depreciation deductions, unit by units sold deduction. 50% (100% for oil and gas property) of your tax
during the tax year. able income from the property figured without
b. Deferred expenses (including defer the depletion deduction and the domestic pro
red exploration and development You must keep accounts for the depletion of duction activities deduction.
costs), and each property and adjust these accounts each Taxable income from the property means
c. Deductions other than depletion. year for units sold and depletion claimed. gross income from the property minus all allow
able deductions (except any deduction for de
2. The residual value of land and improve Elective safe harbor for owners of oil and pletion or domestic production activities) attrib
ments at the end of operations. gas property. Instead of using the method de utable to mining processes, including mining
3. The cost or value of land acquired for pur scribed earlier to determine the total recovera transportation. These deductible items include,
poses other than mineral production. ble units, you can use an elective safe harbor. If but are not limited to, the following.
you choose the elective safe harbor, the total Operating expenses.
Adjusted basis. The adjusted basis of recoverable units equal 105% of a property's Certain selling expenses.
your property is your original cost or other ba proven reserves (both developed and undevel
sis, plus certain additions and improvements, oped). For details, see Revenue Procedure Administrative and financial overhead.