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Mines and Geothermal Deposits Certain mines, wells, and other natural depos- its, including geothermal deposits, qualify for percentage depletion. Mines and other natural deposits. For a nat- ural deposit, the percentage of your gross in- come from the property that you can deduct as depletion depends on the type of deposit. The following is a list of the percentage de- pletion rates for the more common minerals. 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 . . . . . . . . . . . . 7.5% 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). Corporate deduction for iron ore and coal. The percentage depletion deduction of a corporation for iron ore and coal (including lig- nite) is reduced by 20% (0.20) of: • The percentage depletion deduction for the tax year (figured without this reduc- tion), minus • The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Gross income from the property. For prop- erty other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Mining includes all the following. • Extracting ores or minerals from the ground. • Applying certain treatment processes de- scribed later. • 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. Excise tax. Gross income from mining in- cludes the separately stated excise tax re- ceived 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. Extraction. 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. 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. Treatment processes. The processes in- cluded as mining depend on the ore or mineral mined. To qualify as mining, the treatment pro- cesses must be applied by the mine owner or operator. For a listing of treatment processes considered as mining, see section 613(c)(4) and the related regulations. Transportation of more than 50 miles. 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 inclu- ded in the calculation of gross income from min- ing. If you wish to include transportation of more than 50 miles in the calculation of gross income from mining, request an advance ruling from the IRS. Include in the re- quest the facts about the physical and other re- quirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. For more information about requesting an advance ruling, see Revenue Procedure 2018-1, available at IRS.gov/irb/ 2018-01_IRB#RP-2018-1. Disposal of coal or iron ore. You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. • You disposed of it after holding it for more than 1 year. • You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Treat any gain on the disposition as a capital gain. Disposal to related person. This rule does not apply if you dispose of the coal or iron ore to one of the following persons. • A related person (as listed in chapter 2 of Pub. 544). • A person owned or controlled by the same interests that own or control you. Geothermal deposits. Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liq- uid or vapor. For percentage depletion purpo- ses, a geothermal deposit is not considered a gas well. Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. See Gross income from the property, earlier, under Oil and Gas Wells. Per- centage depletion on a geothermal deposit can- not be more than 50% of your taxable income from the property. Lessor's Gross Income In the case of leased property, the depletion de- duction is divided between the lessor and the lessee. A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Bonuses and advanced royalties. 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. If you are the lessor, your income from bonuses and advanced royalties received is subject to an al- lowance for depletion, as explained in the next two paragraphs. Figuring cost depletion. To figure cost depletion on a bonus, multiply your adjusted ba- sis 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. To figure cost depletion on ad- vanced royalties, use the calculation explained earlier under Cost Depletion, treating the num- ber of units for which the advanced royalty is re- ceived as the number of units sold. Figuring percentage depletion. 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. Any bo- nus or advanced royalty payments are gener- ally part of the gross income from the property to which the rates are applied in making the cal- culation. 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. Ending the lease. 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. Do this for the year the lease ends or is abandoned. Also, increase your adjusted basis in the property to restore the depletion deduc- tion you previously subtracted. 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. In- clude this amount in income for the year the lease ends. Increase your adjusted basis in the property by the amount you include in income. Delay rentals. These are payments for defer- ring development of the property. Since delay rentals are ordinary rent, they are ordinary in- come that is not subject to depletion. These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Timber You can figure timber depletion only by the cost method. Percentage depletion does not apply to timber. Base your depletion on your cost or Chapter 9 Depletion Page 39