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 

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms 
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

 

Overview of the US Mining Tax Environment 

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