WorldWide Drilling Resource

27 JUNE 2021 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Records, Documenting Everything for Everybody Records are important, not only to back up tax deductions, but also to qualify for those recent gov- ernment funding programs or traditional loans. And, of course, records are an invaluable tool when preparing the financial statements so necessary in managing the drilling operation. Obviously, there’s a lot more to record keeping than meets the eye. The so-called “Cohan Rule” allows taxpayers to deduct business expenses even if they do not have the receipts to document them. But both the Internal Revenue Service (IRS) and the Tax Court can legally reconstruct the expenses and income of any busi- ness without records, and it is up to the taxpayer to prove them wrong. A cancelled check and an invoice marked “paid”, along with the serial number of the item purchased or a description of the work performed, is standard record keeping 101. However, while this record keeping strategy might be viable for big-ticket items, realistically, it’s not often the case for most of a drilling operation’s expenses, as the IRS well knows. Every drilling business should be able to show a payment was made (e.g., a cancelled check, credit card receipt) and the nature of the item purchased (a n invoice with a description of the item o r service). The drilling operation must als o show a bona fide business purpose fo r an expenditure and there must be aprox - imate relationship between the expendi - ture and the business. Any drilling operation with nonexist - ent or inadequate books and records i s opening the door to having the IR S reconstruct the operation’s income. I n one recent court case, the IRS’s recon - struction of income based on bank deposit s was challenged by the taxpayer. Although the Tax Court did not “se e bad faith in the way the IRS conducte d this bank-deposits income reconstruc - tion,” if it had turned out to have bee n inaccurate, the fault was with the tax - payer’s failures at record keeping. Afte r all, as the court pointed out, the burde n of proof was on the taxpayer to sho w the IRS was wrong, which he couldn’ t do without records. Bottom line, more claimed deduc - tions are disallowed by the IRS an d more loans denied by lenders for lack o f substantiation than for being nonde - ductible or unqualified. Obviously, record s are not only about making the IRS happy , they can play an extremely important rol e in operating and managing the drillin g business. How, after all, can any drilling con - tractor monitor the progress of his o r her business and guide it to increase d profits and success without records? Mark Mark E. Battersby may be contacted via e-mail to michele@