Depletion AMT adjustment

[Exponet]

I would like to know if any one knows how to figure the AMT adjustment for depletion. Generally my clientele does not have to worry about the AMT. This year client comes in with about $215,000 of royalty income with his usual $35,000 of wages and less than $1,500 interest and dividend income. My ATX Max program made no adjustments on the 6251 or any mention in diagnostics when I checked the return. The depletion amount of $32,250 and I don’t want them to be subject to penalties and interest because of my error. Any help would surly be appreciated.

[Bees Knees]

TTB page 14-2 gives two possible adjustments you may need to make:

1. Depletion, regular tax: A deduction for depletion is allowed subject to income limits. AMT adjustment: Recompute depletion deduction based on AMT income and basis of property.

2. Intangible drilling costs, regular tax: Generally allowed as a current deduction or optional 60-month write-off. AMT adjustment: Adjustment is required if a current deduction was taken for intangible drilling costs.

[Exponet]

Depletion Example Info

what I am looking is maybe an example? These are very vague? Any idea were I could find an example or a step by step process.

[Bees Knees]

I don’t think it is vague. I think it is complicated.

You have cost depletion. You have percentage depletion. Percentage depletion depends on the mineral property. Lets say it is a silver mine. Percentage depletion is 15% of gross income, and it can exceed basis. Cost depletion cannot exceed basis. However, percentage depletion cannot exceed 50% of taxable income derived from the property. That limit is 100% for oil and gas properties. Since depletion is limited, depending on the type of mineral being extracted, the gross income from the activity and the taxable income from the activity has to be recalculated using AMT rules. AMT rules may produce different gross income and taxable income amounts because of the differences between regular tax deductions and AMT deductions, such as 150% DDB depreciation on equipment verses 200% DDB depreciation.

You basically have to do the tax return twice, using two different set of rules to determine what is subject to AMT verses regular tax. I’d start charging the client for some big bucks because you are going to be staying up half the night to do this one.

[Exponet]

Bees Knees

Thank you for input. I hope you respond to this post. I found this information on the IRS website that might solve all my problems. It is the MSSP for the Oil & Gas Industry on page 3-51

ALTERNATIVE MINIMUM TAX
There are two tax preference items which are applicable to oil and gas. They are percentage depletion and IDC. These tax preference items are applicable to independent producers and royalty owners through taxable years beginning before January 1, 1993. The Energy Policy Act of 1992 repealed both alternative minimum tax preference items, percentage depletion and IDC, for independent producers and royalty owners, not integrated oil companies. The repeal is effective for taxable years beginning after December 31, 1992.

The way I read this as since my client is a royalty owner depletion is not an alternative minimum tax preference item. I hope you concur.
Thanks again.

[Bees Knees]

If your client is a royalty owner of an oil and gas well, then it appears there may be no AMT adjustments needed.

The instructions to form 6251 says:

Optional Write-Off for Certain Expenditures
There is no AMT adjustment for the
following items if you elect for the regular
tax to deduct them ratable over the period
of time shown.
…
• Intangible drilling costs – 60 months…

However, the instructions for line 25, Intangible Drilling Costs (IDCs) gives this exception:

The preference for IDCs from oil and gas wells does not apply to taxpayers who are independent producers (that is, not integrated oil companies as defined in section 291(b)(4). However, this benefit may be limited. First, figure the IDC preference as if this exception did not apply. Then, for purposes of this exception, complete Form 6251 through line 26, including the IDC preference, and combine lines 1 through 26. If the amount of the IDC preference exceeds 40% of the total of lines 1 through 26, enter the excess on line 25 (your benefit from this exception is limited). Otherwise, do not enter an amount on line 25 (your benefit from this exception is not limited).

So yes, there may be no AMT adjustment, unless the IDC preference is substantial. Then there is an adjustment required.

I also agree that percentage depletion is not an AMT issue for a royalty owner, provided we are talking about an oil and gas well. IRS Instructions for Form 6251 say:

Line 9—Depletion
You must refigure your depletion
deduction for the AMT. To do so, use only
income and deductions allowed for the
AMT when refiguring the limit based on
taxable income from the property under
section 613(a) and the limit based on
taxable income, with certain adjustments,
under section 613A(d)(1). Also, your
depletion deduction for mines, wells, and
other natural deposits under section 611
is limited to the property’s adjusted basis
at the end of the year, as refigured for the
AMT, unless you are an independent
producer or royalty owner claiming
percentage depletion for oil and gas wells
under section 613A(c). Figure this limit
separately for each property. When
refiguring the property’s adjusted basis,
take into account any AMT adjustments
you made this year or in previous years
that affect basis (other than current year
depletion).
Enter the difference between the
regular tax and AMT deduction. If the
AMT deduction is greater, enter the
difference as a negative amount.

So it appears to me that intangible drilling costs are the only thing you have to worry about.

[DaveO]

Will choosing to amortize the IDC

Over 60 months remove the AMT adjustment?

[Exponet]

Bees Knees - You made my day!

I appreciate you comments and the substantiation. I was extremely concerned with this client since the amount of royalties. Thanks a bunch!

[Bees Knees]

Will choosing to amortize the IDC over 60 months remove the AMT adjustment?

Yes. By electing 60 month amortization for regular tax instead of taking a current deduction, there is no AMT.

That is why the K-1 instructions for box 13, code I say to report the intangible drilling costs as a separately stated item. It is the partner, not the partnership, that makes the decision whether to deduct currently or amortize over 60 months - for this very reason.