If there are expenses, determine the type and if the taxpayer is deducting them under IRC section 162 as ordinary and necessary business expenses or as exploration or development expenses. In the case of the independent contractor, an IRC section 183 issue can be considered. In either case, whether an employee or independent contractor, a determination of employment tax issues should be considered. Consult the employment tax coordinator if there are any questions or issues regarding the classification of workers or employment taxes. Just as the owner of a business asset is allowed to recover the cost of an asset over its useful life, a miner is allowed to recover the cost of mineral property.
Depletion is taken over the period of time that mineral is being extracted.
The taxpayer is required to use the method which will result in the greatest deduction. The general method used for the calculation of depletion is the cost method. The first step of this method is to determine the number of units which comprise the deposit. The units can be tons of ore, barrels of oil, board feet of timber, etc. The taxpayer must be consistent from year to year in the type of unit being calculated to insure uniformity.