WorldWide Drilling Resource

Write-Off Basics As many in the drilling industry have learned, our ever-changing tax rules can make it difficult to get the full tax deductions they are entitled to for the tools, equipment, and even the machinery which are so essential to every drilling operation and business. The so-called “Extenders” tax law passed late in 2014 did extend the first-year write-off for so-called “Section 179 expenses” and “bonus” depreciation - but only for the 2014 tax year. Unless new legislation is passed, most drilling contractors must be content with the traditional methods for recouping the cost of business property and equipment. Although the current tax rules allow expenditures of up to $25,000 to be expensed or written off in the current tax year, the cost of most tools, equipment, and machinery above that amount can only be recovered via depreciation deductions. In general, the ModifiedAccelerated Cost Recovery System (MACRS) is used to calculate depreciation deductions. In addition to knowing when property was placed in service and determining the amount of depreciation allowed, the drilling operation’s “basis” in the property, as well as it’s “class”, must be determined. Basis is the operation’s investment in the depreciable property. With purchased property, for instance, the basis is generally its cost. A drilling business can choose to use anAlternative Depreciation System (ADS) for some property, which essentially slows annual depreciation, preserving larger depreciation deductions for later years. Identifying the proper class of busi- ness property is essential under the MACRS depreciation system. Tractors used over the road are usually considered to be three-year property, while trucks are classed as five-year property. Machinery and equipment fall into the seven-year category, and commercial buildings have a 39-year “useful” life. From a business standpoint, now might be a good time to replace old, worn- out property. After all, there comes a time when the efficiency of machinery or equip- ment has declined beyond a certain point and downtime and repair costs are rising rapidly. Fortunately, regardless of what the tax laws may have in store down the road, strategies for using business property to generate increased cash flow by using le- gitimate tax deductions currently exist. It is a similar story when it comes to using tax write-offs to reduce the out-of-pocket costs of the tools and equipment which are so essential - and so expensive. Naturally, seeking professional assistance is strongly recommended for any drilling operation or business seeking smaller tax bills. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com Drilling Into Money Not Boring by Mark E. Battersby 39 WorldWide Drilling Resource ® OCTOBER 2015