Where is Depletion Reported in the Individual Tax Return?
Desktop · Written guide Content date 2 min read
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:
- Income
- 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:
- Income
- Business Income/Loss (Sch C, 1099MISC)
- Expenses
- Depletion
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
- Depletion
Note: This is a guide on entering depletion into the Tax Processors Plus Desktop program. This is not intended as tax advice.
Additional Information:
IRS: Publication 535, Business Expenses
IRS: Publication 544, Sales and Other Dispositions of Assets