WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Records: They Could Save Your Business a Bundle As many drilling professionals begin the onerous tax preparation process, they’re once again dis- covering just how important good records are for tax savings. Good records can help every drilling busi- ness generate an accurate tax bill and ward off zealous Internal Revenue Service (IRS) auditors. Surprisingly, the IRS does not require a business keep records in any one manner. Federal income tax laws require only that every business keep “complete and accurate records.” Just what records a drilling business needs to keep, what records it should retain and for how long, is unclear, so long as they produce an accurate accounting of income and expenses. To help prepare future or amended returns, it makes sense to keep a copy of the business’s tax returns permanently. The IRS suggests tax-related records be retained until the “period of limitations” expires for each year’s return. Typically, the IRS can come after a business for failing to report income for up to six years after filing if the amount is greater than 25% of the operation’s gross income. If a deduction was claimed for a bad debt or worthless security, the IRS recommends retaining supporting tax records for seven years. When it comes to employees, the IRS recommends keeping payrol l records on hand for at least four years in case of an audit. This should include all wages, pension payments, tip infor- mation, W-2 and W-4 forms, and any other related information. If the drilling operation works with independent contractors or third parties, it may also be necessary to meet some state record keeping requirements. Virginia, for example, requires contracts with independent contractors be kept for at least five years. With business property, the IRS sug- gests retaining records until the period of limitations ends for the tax year when the property was disposed of. These records will aid in calculating deprecia- tion, amortization, or depletion deduc- tions - and for determining any eventual gain or loss. Above all, avoid checks made out to cash. In fact, whenever possible, avoid using cash. More claimed tax deductions are disallowed for lack of substantiation rather than for being nondeductible. Consulting with an attorney or tax professional can help guide every drilling business to a legal and tax-com- pliant record keeping policy. To avoid identity theft and to protect sensitive business informat ion, al l business records should be disposed of properly or shredded. Mark michele@ worldwidedrillingresource.com 7 WorldWide Drilling Resource ® NOVEMBER 2019 Howard Hughes Sr. applied for a U.S. patent for this invention in 1908. Maybe you’ve heard of it. Find out on page 17!