**The information below has not been verified for the 2020 tax year as IRS Pub. 535 has not yet been released by the IRS.**
If you received a Schedule K-1 (Form 1065) Partner’s Share of Income, Deductions, Credits, etc. with an amount reported in Box 20 with a code "T" for depletion and you do not have royalty income or deductions to report on Schedule E (Form 1040) Supplemental Income and Loss on page 1, please follow the steps below to enter this information on to your return.
Use the information provided by the partnership to compute your depletion deduction.
There are two ways of figuring depletion on mineral property; cost depletion and percentage depletion. Generally, you must use the method that gives you the larger deduction. However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. See Oil and Gas Wells, later.
To figure cost depletion, you must first determine the following:
With those items determined, you can compute cost depletion:
To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income for the property during the tax year. When figuring gross income do not include any rents or royalties you paid or incurred for the property. The percentage depletion deduction generally cannot be more than 50% of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction.
A small producer's exemption is available for small oil and gas producers and royalty owners. Small producers use percentage depletion at a rate of 15%.
Please refer to IRS Publication 535 Business Expenses, starting on Page 35 for additional information about Depletion.
Once you have determined the depletion deduction, add a separate Schedule K-1 to your return. Enter "Depletion Deduction" in the Partnership Name field and use the same EIN as reported on the Schedule K-1 you received. Enter the depletion deduction in Box 1 as an ordinary loss (enter in Box 1 as a negative number). If you need to report the deduction as nonpassive, you must select that you were a Material Participant.
Per IRS Instructions for Schedule E Supplemental Income and Loss, on page 10:
For nonpassive income or loss and passive income or losses for which you are not filing Form 8582, enter in the applicable column of line 28 your current year ordinary income or loss (after applying any special rules that limit losses) from the partnership or S corporation. Report each related item required to be reported on Schedule E (including items of income or loss stated separately on Schedule K-1) in the applicable column of a separate line following the line on which you reported the current year ordinary income or loss. Also, enter a description of the related item (for example, depletion) in column (a) of the same line.
If you are required to file Form 8582, see the Instructions for Form 8582 before completing Schedule E.
To enter depletion deduction information:
Note. If you have royalty income to report, you would not use the steps above to enter your depletion deduction. Instead, you would enter the royalty income in Box 7 of the Schedule K-1, and the depletion deduction in Box 20 (code "T"). Each of these entries can be found within the Schedule K-1 (Form 1065) Q&A screens. You would still use the calculation methods mentioned above to manually determine your depletion deduction.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.