WorldWide Drilling Resource

48 AUGUST 2013 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Tax Profits with Equipment Large purchases, including equip- ment acquisitions, just became easier - and less expensive - thanks to new tax breaks created by theAmerican Taxpayer Relief Act. Those drilling contractors who hesitated or postponed making capital investments because of the recent eco- nomic downturn might now want to re- consider. First, an expense deduction is avail- able for drilling operations which choose to treat the cost of qualifying property and equipment, called Section 179 prop- erty, as an expense rather than a capital expenditure. Section 179 property is gen- erally defined as new or used depreciable tangible property purchased for use in the business. A dollar limit is placed on the max- imum cost of Section 179 property a drilling business may expense during the tax year. Thus, a drilling business can expense and immediately deduct up to $500,000 of the cost of equipment and other business property, subject to a phaseout if total capital expenditures exceed $2,000,000. On the downside, the first-year write-off is also limited to the drilling operation’s taxable income during the tax year. A drilling business will usually reap the greatest benefit from Section 179 by expensing property which does not qualify for bonus depreciation, such as used property, and property with a long depreciation period. Given the choice between expensing an item of five-year property and an item of 15-year property, the 15-year property should be expensed since it takes 10 additional tax years to recover its cost through annual depre- ciation deductions. Today, the tax law allows a 50% “bonus” depreciation write-off for equip- ment and property placed in service through the 2013 tax year. Some trans- portation and longer-lived property are even eligible for bonus depreciation through 2014. With bonus depreciation, unlike the Section 179 write-off which can be either used or new, the taxpayer must be the “first to use.” What’s more, to be eligible for bonus depreciation, property must be depreciable under the MACRS [Modified Accelerated Cost Recovery System] standard, and have a recov- ery period of less than 20 years. The American Taxpayer Relief Act of 2012 renewed and expanded many tax breaks designed to help drilling con- tractors, operations, and businesses reap benefits from capital investments in new equipment and business property. Opportunities abound for reducing the out-of-pocket costs for acquiring equip- ment and business property needed by the drilling operation. Not too surpris- ing, the assistance of a qualified tax pro- fessional is highly recommended for every drilling professional. Mark Mark E. Battersby may be contacted via e-mail at admin@ worldwidedrillingresource.com