WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Profitable Profit Dispositions Despite the hoopla and promises, few drilling contractors will see the results from last December’s Tax Cuts and Jobs Act (TCJA) until their tax returns are filed. Today, thanks to the TCJA, answering the quesiton of whether to reinvest profits in the drilling business or to create a separate nest egg must factor in taxes. First, reinvestment usually involves profits before they are diluted by the annual tax bill. To invest those profits or to create a separate nest egg usually involves profits after they have been reduced by taxes - but not always. Fortunately, the tax laws, before and after the TCJA, do allow some tax breaks for investing or creating a nest egg. Reinvesting profits in the drilling business is considered a legitimate business expense and is deductible, not taxed. But what if the business turns sour? Savings should be a priority for every drilling business owner. Luckily, a number of resources exist for saving, many which involve investing pre-tax dollars in so-called “tax-favored” plans ranging from Individual Retirement Accounts (IRAs) to more complex plans such as SEPs (Simplified Employee Pension), Self-Employed 401(k) Plans, and Savings Incentive Match Plan for Employees (SIMPLE) plans. A significant write-off is available if it can be argued the new, money-losing operation is really an extension of the original business. For a new, unrelated business, however, losses can be a problem. Today, those formerly allow- able hobby deductions were completely disallowed as miscellaneous itemized deductions. Proving an activity is a business means profit motive must be present and some type of economic activity must be conducted. With profits in three out of five consecutive tax years, it is up to the Internal Revenue Service to prove the activity is a hobby. In the case of an act ivi ty of breeding, training, showing, or racing horses, the three out of five rule is two years out of seven. Without profits, it is the drilling profes- sional who must prove the activity is a business - if asked - often employing a nine-point test created by the courts. With two decisions, either plow the profits back into the business to improve or expand the operation or create a sep- arate nest egg, many drilling contractors and business owners face a dilemma. Fortunately, a legion of professional advisors stands ready to help every drilling owner as they decide whether to reinvest in the business or create a sep- arate nest egg. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com 23 WorldWide Drilling Resource ® DECEMBER 2018