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 government 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 business 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 (an invoice with a description of the item or service). The drilling operation must also show a bona fide business purpose for an expenditure and there must be aproximate relationship between the expenditure and the business. Any drilling operation with nonexistent or inadequate books and records is opening the door to having the IRS reconstruct the operation’s income. In one recent court case, the IRS’s reconstruction of income based on bank deposits was challenged by the taxpayer. Although the Tax Court did not “see bad faith in the way the IRS conducted this bank-deposits income reconstruction,” if it had turned out to have been inaccurate, the fault was with the taxpayer’s failures at record keeping. After all, as the court pointed out, the burden of proof was on the taxpayer to show the IRS was wrong, which he couldn’t do without records. Bottom line, more claimed deductions are disallowed by the IRS and more loans denied by lenders for lack of substantiation than for being nondeductible or unqualified. Obviously, records are not only about making the IRS happy, they can play an extremely important role in operating and managing the drilling business. How, after all, can any drilling contractor monitor the progress of his or her business and guide it to increased profits and success without records? Mark Mark E. Battersby may be contacted via e-mail to michele@