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United States

19.A22. An unlimited deduction against taxable income is available on an optional basis for exploration expenditure (except if incurred on oil and gas) provided that the amount deducted is brought to account as income (or ‘recaptured’) when the mine reaches production or is sold. This is accomplished by the taxpayer electing either to (i) include the previously deducted exploration expenditure chargeable to the mine as income for the year in which the mine reaches production or is sold, increase the ‘basis’ of the property by the amount included as income, and subsequently recover this amount through depletion, or (ii) forgo depletion from the property until deductions forgone equal exploration expenditure previously deducted. Expenses not recaptured by any of these methods are recaptured on the sale or disposition of the mining property.

19.A23. Exploration-type expenditure which is incurred during the development or producing stage of a mine is treated as development expenditure deductible currently, rather than mining exploration expenditure subject to recapture.

19.A24. With regard to oil and gas well drilling expenditure, a taxpayer may elect to treat drilling expenditure as a current expense deductible in the year in which it is incurred or, alternatively, as a charge to capital which is recoverable through depletion or depreciation as ‘intangible drilling and development costs’. If he elects for the latter alternative and the well later proves to be non-productive, he may elect to deduct such costs as an ordinary business loss. Thus, in oil and gas exploration, capital investment is usually recovered in full.

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