Gravel Pit inventory

[susie33]

I received a new client a few years. A small S Corporation owning a gravel pit. The pit had been leased to be mined before I came on. A previous accountant had set up an inventory at the time of the original lease. Last spring the original lease was terminated and the pit was re-leased to another entity. The original inventory figure associated with he first lease has not been depleted on the books only. The new lease paid a substantial sum. It has been suggested the remainder of the original inventory stated in the books be deducted in full as it was part of the original lease. What thoughts does anyone have on this?

[TaxGuyBill]

I don't know much about the tax aspect of mining so I should probably keep quiet, but ...

Inventory???

Are they selling anything? Or just leasing the land area so it can be mined? They may have "depletion" (similar to depreciation), but I don't see how Inventory would apply at all.

Even if there somehow was inventory, why would it be deducted in full if they still own it?


But as I said, I don't know much about the tax aspect of mining, so maybe I'm missing something.

[jmcdtax]

See TaxBook 9-17 and 9-18 Depletion. The depletion rate for gravel is 5%. Also, see code section 613(b)

[DoubleO]

I’m going to be lazy here. 5% of what?

[jmcdtax]

5% of revenue. Research is important!