WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Changing Tax Horses After the tax returns were filed and the annual tax bill paid, many within the drilling industry found themselves ask- ing why certain transactions were han- dled the way they were. Was it really necessary to use the complex and often confusing accrual method of account- ing when basic cash accounting might have produced better results? Unfortunately, changing the way a drilling business accounts or has ac- counted for income and expenses is considered to be accounting changes, requiring permission of the IRS (Internal Revenue Service) to undertake. So IRS permission is required before changing the way things are accounted for - even accounting method changes demanded by an IRS auditor or those necessary to comply with new tax laws. And those requests to change accounting methods all require certain adjustments to avoid distorting the drilling operation’s income and/or deductions. Because the IRS doesn’t want any business to change accounting meth- ods willy-nilly, changing the “method of accounting” - the way something is accounted for on the tax return which affects the timing of income or expens- es - timing is everything for tax purpos- es. After all, according to our tax laws, a change in the method of accounting occurs when the method to be used by a taxpayer for an item when computing taxable income is different than the operation’s “established” method of accounting. Tax laws require all businesses to get IRS permission to change a “method of accounting.” To obtain the IRS's con- sent to change a method of accounting, a drilling business must usually file a Form 3115, Application for Change in Accounting Method , during the taxable year for which the change is proposed. With many Forms 3115 filed for nonau- tomatic changes requiring additional information, the IRS recommends filing a Form 3115 as early as possible dur- ing the year of change. The IRS recently made it easier for small drilling businesses, including sole proprietors, with assets totaling $10 mil- lion or less to comply with the final reg- ulations for repair write-offs. The new repair rules distinguish between “im- provements”, which have to be capital- ized and “repair” expenses, which can be deducted. If any drilling company, manufactur- er, distributor, or supplier has significant depreciable property, it’s probably worth the effort to investigate the advantages (and potential pitfalls) involved in chang- ing accounting methods. Naturally, the assistance of a qualified professional will make things go smoother, as well as possibly unearth other areas which may benefit from a change in account- ing methods. Mark Mark E. Battersby may be contacted via e-mail at michele@ worldwidedrillingresource.com Great friends in Texas! Guess who? John, Susan, and Buddy with SEMCO, Inc. Show me the money! Daniel (C) paid a visit to Benny and Josh of Baroid IDP. A good-looking group of fellas! Michael, Ray, and Zechariah of Mills Bit Service, Inc. Batman faces! 58 JUNE 2015 WorldWide Drilling Resource ®