The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. You recover these costs through depletion as the mineral is removed from the ground. However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil, gas, and geothermal wells). taxmap/pubs/p535-030.htm#en_us_publink1000144842
You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. The election applies to the tax year you make this election and all later tax years. taxmap/pubs/p535-030.htm#en_us_publink1000144843
Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. taxmap/pubs/p535-030.htm#en_us_publink1000144844
A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. For more information on this method of amortization, see Internal Revenue Code section 59(e).
The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544.
These rules also apply to the deduction of development costs by corporations. See Development Costs, later. taxmap/pubs/p535-030.htm#en_us_publink1000144845
When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Use either of the following methods.
- Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Your election must be clearly indicated on the return. Increase your adjusted basis in the mine by the amount included in income. Generally, you must elect this recapture method by the due date (including extensions) of your return. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Make the election on your amended return and write "Filed pursuant to section 301.9100-2" on the form where you are including the income. File the amended return at the same address you filed the original return.
- Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted.
You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years, until the depletion you would have deducted equals the exploration costs you deducted.
Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income.
Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. taxmap/pubs/p535-030.htm#en_us_publink1000144846
If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. (Cost depletion is discussed in chapter 9.) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. These rules also apply to foreign development costs.