WorldWide Drilling Resource

To be noticed, give us a call: (850) 547-0102 or e-mail: wwdr@worldwidedrillingresource.com 12 NOVEMBER 2020 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Changing Tax and Accounting Ships Adding to the turmoil in the life of every drilling contractor, the Internal Revenue Service (IRS) has proposed updates to the tax accounting regulations. Fortunately, the proposed rules will allow small busi- nesses, those with “inflation-adjusted average annual gross receipts of $26 million or less” to utilize “sim- plified” tax accounting rules. Although there is no right accounting method for all businesses, in addition to using the accounting method that most clearly shows income, the drilling business must use the same accounting method for both tax and book- keeping purposes. Most sole proprietors and small businesses use the cash method because they find it easier to keep cash method records. The cash basis method of accounting recognizes revenues when money comes into the drilling operation, and recognizes ex- penses when money is paid out. Cash basis accounting doesn’t recognize accounts receivable or payable. It is only when a bill is paid, that an operation using the cash method of accounting recognizes an expense. The IRS doesn’t want anyone willy-nilly changing anything which might affect their annual tax bill. Changing the method of accounting - the way something is accounted for on the tax return which affects the timing of income or expenses - can affect that tax bill. Thus, the tax laws require every business to get the permission of the IRS to change a method of account- ing. IRS permission is required before changing the way things are accounted for, even changes demanded by an IRS auditor or necessary to comply with new tax laws. To obtain the IRS's consent to change a method of accounting, a drilling business usually must file Form 3115, Application for Change in Accounting Method, during the taxable year for which the change is proposed. Additionally, those requests to change accounting methods usually require certain adjustments to avoid distorting the drilling operation’s income and/or deductions. The “adjustment" required whenever accounting methods are changed involves computing the amount necessary to prevent deductions from being duplicated or income omitted when the operation computes its taxable income for the year of change using a different accounting method. Although drilling companies should choose an accounting method which shows their operation's real-time financial health, the IRS’s newly proposed rules will allow far more drilling professionals to simplify their recordkeeping by using the cash method of accounting. Naturally, the advice of a professional familiar with the drilling business should always be solicited. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com Looking for Events? Click on this box in our online issue worldwidedrillingresource.com

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