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 to figure depletion: cost depletion and percentage depletion. The method that yields the largest deduction is generally the method used, however percentage depletion can only be taken by a property that has net income. If a property has a net loss, percentage depletion cannot be deducted in the current year. The IRS sets different depletion rates based on the resource. Standing timber is a renewable resource for which the IRS requires taxpayers to use the cost depletion method.
Depletion reported by a partnership or S corp on Schedule K-1 is an AMT item and is reported on Form 6251. Depletion reported by an estate or trust on Schedule K-1 is treated as a passive deduction that may or may not be allowed in the current year depending on all the passive gains and losses in the return. Depletion reported by a business operated as a sole proprietorship is reported as an expense on Schedule C.
To enter depletion reported on a Schedule K-1, from the Main Menu of the tax return (Form 1040) select:
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input:
- Form 1041 - Line 9B
- Form 1120-S - Line 15C
- Form 1065 - Line 17C
To report depletion on Schedule C (see here for instructions on creating it), from the Main Menu of the tax return (Form 1040) select:
- Business Income/Loss (Sch C, 1099MISC)
To report depletion on Form 6251, from the Main Menu of the tax return (Form 1040) select:
- 2021 and forward: Tax Computation
2020 and prior: Other Taxes
- Alternative Minimum Tax (6251)
- Adjustments and Preferences
Note: This is a guide on entering depletion into the TaxSlayer Pro program. This is not intended as tax advice.
IRS: Publication 535, Business Expenses
IRS: Publication 544, Sales and Other Dispositions of Assets