WorldWide Drilling Resource®

To be noticed, give us a call: (850) 547-0102 or e-mail: 12 APRIL 2020 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Trade, Sell, and Maybe Abandon with a Low Tax Bill It is no surprise many drilling professionals don’t understand the tax ramifications of disposing of busi- ness property. Under our often confusing and complex current rules, there are numerous ways to dispose of business assets - such as selling, scrapping, exchanging it for another business asset, or even giving it away. Even with a simple sale, the tax treatment can be quite complex with a number of rules affecting the outcome of any transaction - including how losses are viewed by the Internal Revenue Service (IRS) and how a portion of the sale may have to be “recaptured” if the sale involves property depreciated in the past. A drilling operation can generally sell its unused or unneeded equipment, machinery, and other business assets on the in- stallment method. Selling with payments to be received in installments means taxable income is created only as payments are received. New, more restrictive rules mean a drilling operation can no longer treat trade-ins as nontaxable events. Instead, when the old asset is traded for a new one, tax must be paid on the gain, if any. So, yes, it applies when a vehicle is traded-in. Remember, all business assets - including vehicles - are depreciated. It is the difference between the value shown on the operation's books and the amount realized or given credit for that is used in the gain or loss computation. With the standard vehicle write-off, depreciation is implied - although not usually shown. And, before you ask, when you take advantage of the 100% bonus depreciation or the Section 179 expense allowance, it brings the book value down to zero, creating a gain if any- thing is realized when replaced with a new, more valuable asset. It wasn’t too long ago, before the passage of the Tax Cuts and Jobs Act (TCJA), a business would exchange so-called “like-kind” property and defer taxable gain until the property was ultimately sold. However, beginning with exchanges after the December 31, 2017, passage of the TCJA, deferring recognition of gain using a like-kind exchange will only work with real estate. Real estate includes land and generally anything built on or attached to it. Abandonment losses from business or investment property are generally deductible as ordinary losses. Of course, aban- donment of property held for personal use is nondeductible. An involuntary conversion is an event not initiated by the drilling business, but refers to the conversion of the operation’s property into similar or dissimilar property due to condemnation (actual or threatened), theft, seizure, requisition usually insti- gated by a government unit, or destruction. An involuntary conversion does not include any voluntary acts, such as when the business destroys its own property. Depreciation recapture means the IRS can require a business to “pay back” amounts claimed as bonus depreciation or other fast write-offs. Under our tax rules, a disposition occurs when a business sells, exchanges, retires, abandons, suffers an involuntary conversion, or destroys. Each has tax consequences and, thanks to the complexity of the tax rules, professional guidance may be necessary to reap the most benefit and smallest tax bill. Mark Mark E. Battersby may be contacted via e-mail to