6885 depletion of natural resources two methods are

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¶6885 Depletion of Natural Resources Two methods are available to taxpayers for computing the depletion deduction: the cost depletion method and the percentage depletion method. The taxpayer would normally compute the proper deductions using both depletion methods and then claim the higher deduction for tax purposes. Cost Depletion Method Cost depletion is computed by dividing the basis of the natural resource by the estimated units to be recovered. The depletion amount per unit is then multiplied by the number of units of the natural resource sold during the year which gives the cost depletion deduction for the tax year. Percentage Depletion Method Percentage depletion is computed by taking a speci fi ed depletion percentage and applying it to the gross income for the year derived from the sale of the natural resource.
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88 CCH Federal Taxation—Comprehensive Topics Chapter 6 © 2009 CCH. All Rights Reserved. ¶6901 Substantiation of Tax Deductions Taxpayers must be able to substantiate the deductions claimed on their tax returns if requested by the IRS through the audit process. Taxpayers can normally substantiate tax deductions by providing documentary evidence such as receipts, invoices, and cancelled checks. ANSWER TO KEYSTONE PROBLEM—CHAPTER 6 (¶6855.) The depreciation deduction allowable to Able Garment Co. on its 2009 and 2010 tax returns based on regular depreciation rates and ignoring the Section 179 deduction is computed as follows: 2009 Depreciation Computations Asset Cost Class Life Depr Pctg 2009 Depr 1. Car $19,000 5 yr. 20% $2,960 * 2. Car 22,000 5 yr. 20% 2,960 * 3. Of fi ce furniture 14,250 7 yr. 14 2 / 7 % 2,036 4. Business equipment 38,950 7 yr. 14 2 / 7 % 5,564 5. Of fi ce building 95,000 39 yr. SL 710 ** Total allowable depreciation deduction—2009 $14,230 * Maximum depreciation deduction for passenger automobile purchased in 2009 is limited to $2,960. Code Secs. 168(k)(2)(F) (i) and 280F(a)(1)(A)(i). ** Of fi ce building was purchased in September. Thus, depreciation deduction for 2009 is limited to 3 ½ months. 2010 Depreciation Computations Asset Cost Class Life 2009 Depr Remaining Basis Depr Pctg 2010 Depr 1. Car $19,000 5 yr. $2,960 $16,040 40% $4,800 * 2. Car 22,000 5 yr. 2,960 19,040 40% 4,800 * 3. Of fi ce furniture 14,250 7 yr. 2,036 12,214 2 / 7 ths 3,490 4. Business equipment 38,950 7 yr. 5,564 33,386 2 / 7 ths 9,539 5. Of fi ce building 95,000 39 yr. 710 N/A SL 2,436 ** Total allowable depreciation deduction—2010 $25,065 * Second year depreciation limitation on passenger autos is $4,800. Code Sec. 280F(a)(1)(A). ** $95,000 ÷ 39 yrs = $2,436.
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89 Instructor’s Manual © 2009 CCH. All Rights Reserved. Chapter 6 ANSWERS TO QUESTIONS—CHAPTER 6 Topical List of Questions Classi fi cation of Tax Deductions (¶6001) 1. Production of Income Deductions (¶6301) 2. Deductions “for” vs. “from” AGI (¶6101) 3. Improper Classi fi cation of Deductions (¶6101) 4. Trade or Business Expenses (¶6201) 5. Salary Payments to Employee/Owners (¶6235) 6. Hobby Activities (¶6215 and ¶6715) 7. Business v. Personal Expenses Allocation (¶6725) 8.
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