WorldWide Drilling Resource

57 WorldWide Drilling Resource ® JANUARY 2014 Drilling Into Money Not Boring by Mark E. Battersby Good Bad Debt Tax Savings What water well drilling, irrigation, or wastewater contractor hasn’t suffered with customers who do not pay?Accounts receivable are not always collected in full due to a variety of reasons. Some- times customers simply evade payment and the cost of pursuing them is more than the recoverable amount; sometimes they become bankrupt; sometimes the debt becomes time-barred, etc. Bottom line, no matter how hard you try, even after friendly attempts at col- lection, you haven't received the total amount owed and suspect you never will. At that point, you have two choic- es: write off the amount as a bad debt, or forgive the debt entirely. While there is no deduction for debt forgiveness, under our tax rules, a bad debt is defined as an account or note receivable that proves to be entirely or partially uncollectable despite collection efforts. Bad debts are written off as soon as they are determined, because the professional drilling contractor or busi- ness does not expect future economic benefits and it no longer remains an asset. A personal bad debt is normally not deductible; if allowed deductible by the Internal Revenue Service (IRS), it would be treated as a short-term capital loss - limited to $3000 per year. Unfortunately, just because some- thing may be labeled as a business bad debt doesn’t necessarily make it tax deductible. A bad debt deduction can be claimed only if the amount owed was included in the drilling operation’s gross income. This is almost never the case for cash method drilling contractors and businesses (that means most of us who report income when we receive it). Accrual method drilling contractors and businesses however, report income as it’s earned; if receivables have already been claimed as income, a bad debt deduction for uncollectible receivables is appropriate. To ensure the drilling operation does- n’t miss out on a bad debt deduction, it must be able to show the debt is par- tially or totally worthless. What’s more, the tax law doesn’t allow a deduction for any part of a debt after the year in which it becomes totally worthless. Records should be reviewed care- fully to pinpoint any potentially worthless receivables carried on the drilling oper- ation’s books. Because of potential IRS challenges, all failed collection efforts should be carefully documented. Beware, this area of our tax law is tricky, so seek- ing professional assistance is strongly recommended. Mark Mark E. Battersby may be contacted via e-mail at admin@ worldwidedrillingresource.com