WorldWide Drilling Resource

www.starironworks.com 257 Caroline Street Punxsutawney, PA 15767 800-927-0560 • 814-427-2555 Fax: 814-427-5164 SERVINGTHECONSTRUCTION INDUSTRY Serving the Drilling Industry 42 SEPTEMBER 2019 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Starting Up, Branching Out, and Taxes In today’s sluggish economy, it is not unusual for an existing drilling operation or business to branch out, or for the owner to start another business in the same or different field. Uncle Sam, in the form of our tax laws, will not only pickup part of the expense of branching out or starting up a new venture, but will often allow the losses from a secondary activity to be used to reduce the tax bills generated by income from self-employment, wages, investments - or the primary business. Anyone who pays or incurs business start-up costs and who subsequently enters the trade or business can choose to expense and immediately write-off up to $5000 of those costs. However, the $5000 deductible amount is reduced, dollar-for- dollar, when the start-up expenses exceed $50,000. The so-called “organizational” costs of business entities are a separate class of expense from start-up expenses, although subject to similar rules. An incorporated business can, for instance, choose to deduct up to $5000 of any organizational ex- penses incurred in the tax year business begins. The balance of start-up or organizational expenses, if any, are amortized (written-off) over a period of not less than 180 months, starting with the month in which the business begins. Common to almost every situation where business owners have multiple activities, is the question of whether the new ac- tivity is merely a branch or subsidiary of the existing business, or will it be viewed by the Internal Revenue Service (IRS) as a separate activity? If the new venture is an integrated operation, the owner’s primary business could immediately deduct the start-up costs. If not, the rules require they be capitalized and amortized. Whether starting a new venture or expanding an existing one, it may be wise to formalize the operation by incorporating or forming a limited liability company (LLC) to provide personal liability protection and give the new operation an edge when it comes to sales, financing, and of course, taxes. Corporations (both S and C), LLCs, and limited partnerships do offer protection to owners for the debts of the corporation, but the corporate veil can be pierced if the creditor can show the entity was the alter ego of the owners. The IRS can both tax and help underwrite the expansion costs of a drilling-related business or the start-up expenses of a new activity. Will the IRS view your new or expanding operation as a tax business? Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com DIR