WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Repair or Capitalize 2016 Style Once again, every drilling business owner/operator faces the nagging question of when is a repair a capital expenditure. Properly classifying repair, maintenance, and improvement expenses is important because improvements to business property must usually be depreciated over many years - as many as 39 years for some business property. On the other hand, no matter how much they cost, repairs to business property are currently deductible in a single year. If, for example, a company spends $1000 to repair a business vehicle, it can deduct the entire amount in one year. However, if the $1000 amount is to improve the vehicle, it must be deducted a little at a time over five years. Obviously, it is preferable for an expenditure to be classified as a repair rather than an improvement, so the entire amount can be deducted in one year. Unfortunately, distinguishing between a repair and an improvement has not always been easy, even after the sweeping “final” guidelines governing the deductibility of repairs and improvements to business property went into effect on January 1, 2014. Recent changes to those repair regulations haven’t helped. The latest versions of the repair regulations are long and complex, and contain few clear "bright-line rules" which might explain exactly how much an asset must be altered to constitute an improvement. Instead, all of the “facts and circumstances” must be reviewed before making a judgment call. However, in their final revised form, the regulations do provide several benefits specially designed for small businesses. For example, under the new regulations: * Items costing $200 or less are considered supplies, and are currently deductible in a single year. * There is a special “de minimis safe harbor” allowing businesses to immediately write off items costing $500 or less. (Businesses with certified financial statements can write off items costing up to $5000). * Costs for “routine maintenance” are currently deductible. * Business owners can deduct the unrecovered basis (cost) of business property replaced when performing improvements - for example, the unrecovered cost of an old roof can be deducted when a new roof is installed. The “Final” tangible property regu- lations were issued to provide guidance for every drilling business when distin- guishing between a currently deductible repair and a capitalized expenditure. Ob- viously, professional guidance may be necessary to ensure repairs will remain repairs in the eyes of the ever-vigilant Internal Revenue Service. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com +& ""( ' " % #* % $% #% !#% " #%! ' #" ) & ' '"* ' %* &&# ' #" #% ( ($ #! " % &' #' ' " (% March Issue Deadlines! Space Reservation: January 25 th Display & Classified Ad Copy: February 1 st 45 WorldWide Drilling Resource ® JANUARY 2017