WorldWide Drilling Resource

29 WorldWide Drilling Resource ® JUNE 2019 Drilling Into Money Not Boring by Mark E. Battersby Smaller Bottom-Lines for Those Who Lease Whether equipment, other business assets, or even the property housing the drilling operation, lease and rental payments are frequently one of a business’s largest recurring expenses. Soon, however, those leases must be listed as liabilities on the balance sheet - suddenly visible to potential investors, lenders, and suppliers. This is quite a change from the existing treatment where many leases would have been considered as operating leases and rentals simply deducted as operating expenses on the financial statements. Although publicly traded companies were required to begin treating leases as liabilities as of December 15, 2018, privately held drilling operations and businesses have until 2020 to comply - plenty of time to renegotiate lease terms and plan to reap the potential benefits. The culmination of years of debate, the new lease standard (ASC 842, Leases), requires businesses to move the future costs of their operating leases from the footnotes, where they are now reported, to the category of “liabilities” on the balance sheet. A corresponding “right to use” asset gets reported on the asset side. While the new leasing standard will require new accounting procedures and reporting, the benefits of leasing remain - and are perhaps improved. Combined with changes in the tax laws, lease financing with its wide range of inherent advantages, will continue to be a beneficial option of equipment acquisitions. Passed at the end of 2017, the Tax Cuts and Jobs Act (TCJA) included a number of provisions impacting equipment ac- quisitions and financing. Under the TCJA, for example, current deductibility of interest expense is limited to 30% of earnings, with small businesses exempt from this deduction ceiling. Leasing allows a drilling operation without the ability to use 100% bonus depreciation to reap the benefits via a reduced lease rate since the lessor can claim it and other write-offs. Lessees may also enter into sale-leaseback for an asset already fully expensed, since the gain taxed on the sale would be taxed at the new favorable 21% tax rate for corporations. Bottom-line, the new rules have no impact on a drilling operation’s income statement and, thus, there should be no effect on debt covenants. Of course, adopting the new standard, complying with the new definitions for lease transactions, and en- suring a minimal impact on the drilling business’s dealings with potential lenders, investors, and suppliers means starting now. And, as always, professional assistance is highly recommended. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com