WorldWide Drilling Resource

54 AUGUST 2014 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Rewards for Owning the Building An increasingly popular tax-saving strategy involves transferring ownership of the water well drilling or irrigation business’s building or other business equipment, property, or assets to the operation’s owner, partner, or sharehold- er. For many businesses a sale-lease- back can mean liberating badly-needed cash in exchange for executing a lease and paying rent. For other drilling con- tractors, it’s for asset protection purposes such as when a lawsuit is filed against the business, or other issues arise. After a sale-leaseback, the building would at least be protected from any legal actions. For the building’s new owner, there are tax benefits, helping them achieve a lower personal tax bill, income legiti- mately removed from the business and, quite often, more financing options. These transactions, in which an operating drilling business sells its owned and occupied real estate to the opera- tion’s owner, shareholders, or investors and leases the space back on a long- term basis, are a popular way to free up capital for business expansion. Before rushing to take advantage of this strategy, however, every drilling contractor should consider whether it is a good, viable strategy for them and their business. Questions such as, under what type of entity should ownership exist, who will pay the mortgage, reap the tax deductions and, the often over- looked question of what happens if the business changes hands or the owner exits, require answers. As property owners, the interest expense and depreciation were the only tax deductions usually available to the drilling business. A business leasing its premises can, on the other hand, write off the total lease payment as a tax expense. Thus, a sale-leaseback may have a greater tax advantage and pro- duce a larger tax deduction. Unlike a mortgage, a sale-leaseback transaction can often be structured to finance up to 100% of the appraised value of the business’s land and building. As a result, a sale-leaseback more effi- ciently uses the operation’s investment in the real estate asset as a financing tool. Lurking on the horizon are possi- ble changes to the current accounting treatment of sale-leasebacks. Although unlikely to impact on the popularity of these transactions, they should be kept in mind. Obviously, every professional drilling contractor will require the services of a qualified accountant or attorney. A local appraiser can help establish a fair sales price. Above all, make sure the purchase makes good business sense. Mark Mark E. Battersby may be contacted via e-mail at admin@ worldwidedrillingresource.com )0&"%1 "6)&4 ,, ,, 2)&0 -%3120*"+ )0&"%1 "-% 312., )0&"%1 "-3'"$230&0 .' -&02*" !&+%&% 0*++ */& 3"+ !"++ 0*++ */& !*0&+*-& 0*++ .% "1*-( .,/.1*2& !*0&+*-& 0*++ .%1 .-*$ 0*++ */& "1*-( *21 &0$311*.- "1*-( *21 0*++ .++"01 *1)*-( ..+1 3#1 2"02&0 .%1 "-% 2"#*+*7&01 0*++ */& -$ )*0% 2 8 !*-12&% ).-& 8 8 "5 2., %0*++/*/&*-$ $., 8 444 %0*++/*/&*-$ $.,