WorldWide Drilling Resource®

Drilling Into Money Not Boring by Mark E. Battersby Losses ~ Waste Not This may be the year for losses, substantial losses in some cases, but those losses don’t have to be a bad thing. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, as one example, temporarily allowed Net Operating Losses (NOLs), to be carried back to earlier tax years. The result, a refund of taxes paid in those earlier, more profitable years and an infusion of badly needed cash. It's a similar story with casualty losses, at least those occurring in an area declared as a federal disaster area - a label many areas fall under thanks to the coronavirus pandemic. While casualty losses must usually be deducted in the year in which the loss event occurred, today the drilling operation or individual taxpayer has the option of deciding whether the loss would be most beneficial if used to offset the current year’s tax bill or better used to reduce the tax bill for the previous year - generating a refund of previously paid taxes. Often, there are losses that can be controlled - such as when business property or assets are abandoned. If a depreciable business asset or income-producing asset loses its usefulness and is subsequently abandoned, the loss is equal to its adjusted basis. Best of all, this type of loss applies to the abandonment of a business. The CARES Act removed the limitation on Excess Business Losses (EBLs) for noncorporate taxpayers going all the way back to 2017. This allows noncorporate taxpayers to fully offset taxable income with business losses for the 2018, 2019, and 2020 tax years - even if those losses are not related to the coronavirus pandemic. For tax years beginning 2021 through 2026, taxpayers may treat EBLs as NOLs for the purpose of determining a net operating loss carryover in the following year. Whether as a result of economic conditions, competition, or factors outside the control of the drilling professional, every business is at risk of losses. Would a refund on taxes paid by the formerly profitable drilling business in years past help ease the pain of lingering losses this year? What if last year's losses could be used to reduce the tax bill for years to come? Obviously, loss recoveries via tax law are not always smooth, often requiring professional assistance or, at the very least, an understanding of how the tax rules work. Could you or your drilling operation profit from its losses? Mark Mark E. Battersby may be contacted via e-mail to 7 WorldWide Drilling Resource ® JULY 2020