Page 36

Basis reduction for corporations. A corpora- tion must reduce the amortizable basis of a pol- lution control facility by 20% before figuring the amortization deduction. More information. For more information on the amortization of pollution control facilities, see sections 169 and 291(c) and the related regulations. Research and Experimental Costs You can elect to amortize your research and ex- perimental costs, deduct them as current busi- ness expenses, or write them off over a 10-year period (see Optional write-off method below). If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. The amortization period begins the month you first receive an economic benefit from the costs. For a definition of “research and experimen- tal costs” and information on deducting them as current business expenses, see chapter 7. Optional write-off method. Rather than am- ortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. For more information, see Optional Write-Off of Certain Tax Preferences, later, and section 59(e). Costs you can amortize. You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following re- quirements. • You paid or incurred the costs in your trade or business. • You aren't deducting the costs currently. How to make the election. To elect to amor- tize research and experimental costs, complete Part VI of Form 4562 and attach it to your in- come tax return. Generally, you must file the re- turn by the due date (including extensions). However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach Form 4562 to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return. Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Optional Write-Off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. If you make this election, there is no AMT adjustment. The applicable costs and the optional recovery periods are as follows. • Circulation costs—3 years. • Intangible drilling and development costs—60 months. • Mining exploration and development costs—10 years. • Research and experimental costs—10 years. How to make the election. To elect to amor- tize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and at- tach a statement containing the following infor- mation to your return for the tax year in which the election begins. • Your name, address, and taxpayer identifi- cation number. • The type of cost and the specific amount of the cost for which you are making the elec- tion. Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. How- ever, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach Form 4562 to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return. Revoking the election. You must obtain con- sent from the IRS to revoke your election. Your request to revoke the election must be submit- ted to the IRS in the form of a letter ruling before the end of the tax year in which the optional re- covery period ends. The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. If the request for rev- ocation is approved, any unamortized costs are deductible in the year the revocation is effec- tive. 9. Depletion Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. There are two ways of figuring depletion: cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion. Topics This chapter discusses: • Who can claim depletion • Mineral property • Timber Useful Items You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets Form (and Instructions) Schedule E (Form 1040) Supplemental Income and Loss Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Schedule K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. 6198 At-Risk Limitations 8582 Passive Activity Loss Limitations T (Timber) Forest Activities Schedule See chapter 13 for information about getting publications and forms. Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a de- duction for depletion. More than one person can have an economic interest in the same min- eral deposit or timber. In the case of leased property, the depletion deduction is divided be- tween the lessor and the lessee. You have an economic interest if both the following apply. • You have acquired by investment any in- terest in mineral deposits or standing tim- ber. • 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. A contractual relationship that allows you an economic or monetary advantage from prod- ucts of the mineral deposit or standing timber is not, in itself, an economic interest. A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Individuals, estates, and trusts who claim depletion deductions may be lia- ble for the AMT. For tax years begin- ning after 2017, the Tax Cuts and Jobs Act, section 12001, repealed the corporate AMT. Basis adjustment for depletion. You must reduce the basis of your property by the deple- tion allowed or allowable, whichever is greater. 544 551 Schedule E (Form 1040) Schedule K-1 (Form 1065) Schedule K-1 (Form 1120S) 6198 8582 T (Timber) CAUTION ! Chapter 9 Depletion Page 35