Allowable Deductions
For US tax purposes, mining stages are
divided into three categories: exploration,
development, and production. Mine
exploration costs are those costs
incurred after an area of interest is
defined or mineral rights are acquired
and before the development stage of
the mine begins. Exploration costs
include drilling, detailed geophysical
and geological studies, core sampling,
trenching, and other costs incurred to
ascertain the existence, location, extent,
or quality of a mineral deposit.
Costs associated with purchasing or
improving depreciable property would
not qualify as exploration costs, but
depreciation on equipment used in
the exploration work is considered an
exploration cost.
Mine exploration costs are subject
to capitalization and included in the
basis of mineral rights acquired unless
an election is made to deduct such
expenditures. The election to deduct is
made at the taxpayer level and applies to
all subsequent years unless revoked.
To the extent that mine exploration
expenditures have been deducted
with regard to a mine, such amounts
are subject to recapture once the
mine reaches the producing stage.
Recapture is by either a reduction in
the current-year depletion allowance
(i.e., CCA) or, at the election of the
taxpayer, the inclusion of all previously
claimed deductions in the calculation of
income for the year in which production
commences. Any amounts that are
recaptured may be either included in
the property’s adjusted basis for the
purposes of computing cost depletion,
or offset against the amount realized on
a sale or disposition of the property.
Development costs include the costs
of adits, drilling, removal of mine
overburden and waste, drifts, and
sinking of shafts or other physical
undertakings that have no salvage value.
Development costs are deductible
as incurred. For corporate taxpayers,
30% of current-year expenditures
must be capitalized and amortized
ratably over 60 months. Alternatively,
a taxpayer may elect to capitalize mine
development expenditures related to
the ore benefited and amortize such
amounts on a units-of-production basis
as the mineral is produced and sold.
Elections can be made mine-by-mine
and year-by-year. An election must
cover all development expenditures
for the taxable year for each mine
covered by the election, and elections
cannot be revoked. If an election to
defer development expenditures is
made while the mine is still in the
development stage, it covers only the
excess of the expenditures over the
net receipts, if any, from sales. This
limitation does not, however, apply to
development expenditures made when
the mine is in a producing stage.
If a mineral property is located outside
the United States but is owned by a
US taxpayer, exploration expenditures
and development costs incurred
with respect to a mineral property
are deducted ratably over 10 years
unless the taxpayer elects to add the
expenditures to the property’s basis
for cost depletion.
Depletion
The IRC allows the owner of an
economic interest to deplete property
(i.e., claim CCA). Availability of
deductions depends on whether the
taxpayer acquires an economic interest
in a mining property or mining rights.
An economic interest exists where a
taxpayer has acquired, by investment,
any interest in the mineral in place,
and secures, by any form of legal
relationship, income derived from the
extraction of the mineral, to which it
must look for a return of its capital. An
economic interest is defined to include
a working or operating interest, a royalty,
an overriding royalty, a net profits
interest, or a production payment (to the
extent that the latter is not treated as a
loan under the IRC).
Depletion deductions are allowed
with respect to a separate mineral
property. A property is each separate
interest owned by a taxpayer in each
mineral deposit in each separate tract
or parcel of land. For example, two
contiguous leasehold interests over
the same mineral deposit, which
were simultaneously acquired from
separate owners, would constitute
two separate properties.
A taxpayer can claim cost depletion
(a depletion deduction calculated upon
the adjusted basis of the property)
or percentage depletion (a deduction
calculated upon a percentage of
gross income from the property).
The depletion deduction can be taken
only with respect to property that is
exhaustible for tax purposes.
While cost depletion is allowed for
all exhaustible mineral resources,
percentage depletion is restricted to
minerals and, in certain cases, oil and
gas. Where percentage depletion is
allowed, the basis for the deduction is
gross income from the property less an
amount equal to any rents or royalties
paid or incurred by the taxpayer in
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Overview of the US Mining Tax Environment
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