WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby The Future of Pass-Through S Corporations S Corporations have been around for some time and are very popular with those in the drilling in- dustry. However, while it's too early to predict what effect any tax legislation in 2017 will have on the 4.6 million businesses currently operating as S Corporations, significant changes may be in the works. An S Corporation is merely an incorporated drilling contractor, supplier, distributor, or manufacturing business which has chosen to be treated as a partnership for tax purposes. It offers some appealing tax benefits while providing its owner/shareholder with the liability protection of a corporation. The income and losses of S Corporations are passed through to its shareholders and included on the shareholder’s personal tax return. As a result, there is just one level of federal tax to pay. On the downside, S Corporations are subject to many of the same rules and regulations corporations must follow, often resulting in higher legal and accounting fees which must be paid. The S Corporation must also file articles of incorporation; hold directors and shareholders’ meetings; keep corporate minutes; and allow shareholders to vote on major corporate deci- sions. While the income and losses of S Corporations are passed through to the shareholders, shareholders can only deduct those losses up to the amount they have invested in the drilling opera- tion - their “basis.” Basis includes equity investment (adjusted for profits and losses) and any direct loans made by the shareholder to the S Corporation. Today, thanks to S Corporations and other pass-through business entities, most business income is being taxed at the individual tax rate, inflating the an- nual incomes of business owners and making the income a target for “reform.” There’s general agreement the marginal tax rate on regular C Corporations is too high, but if it’s cut, pass-through S Corporations wouldn’t get a cut and may even face a tax increase. One suggested alternative would give pass-through businesses a reduced tax rate compared to the wage income proposals of President Trump (a 15% rate cap) and the House GOP (a 25% rate cap). Both plans have a top ordinary tax rate of 33%, according to reports. Although the rules for switching to or becoming an S Corporation are complex and require monitoring in the months ahead, the advantages for many drilling businesses make the sums spent for professional advice and/or guidance well worthwhile. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com 23 WorldWide Drilling Resource ® APRIL 2017 Morale is when your hands and feet keep working when your head says it can’t be done.