42 OCTOBER 2022 WorldWide Drilling Resource® Drilling Into Money Not Boring by Mark E. Battersby Trade-Ins No More Trade-ins, indeed most tax-free exchanges, are no longer possible under the current tax rules. That’s right, the tax rules have changed and that replaced property’s tax status now impacts only the drilling operation’s income tax bill, although it may also incur a liability for state or local sales taxes. Obviously, today’s trade-ins of vehicles, equipment, and other business property are still useful in reducing the out-of-pocket cost of the new property. However, with no tax incentive for trade-ins, a better deal from the dealer, another party, or merely avoiding the hassle and problems by selling it on your own, are all options for drilling professionals to explore. In some states, the drilling operation may get a break on the sales tax and, while gain may have to be recognized, the cost of the new vehicle or equipment could be eligible for a full tax write-off using Section 179 or bonus depreciation. Today, trade-ins of vehicles or other business property are no longer nontaxable events. Instead, when the old vehicle or property is traded for a new one, income tax is due on the gain, if any. What’s more, to the extent the gain is due to previously claimed depreciation deductions, those gains will be taxed as ordinary income - not the lower capital gain tax rate. Most items, with the exception of land, can be depreciated. For 2022, there is the 100% bonus depreciation write-off for most tangible property - but not real property. The Section 179, first-year expensing option is available for most vehicle and equipment acquisitions. Of course, large first-year deductions mean little to an unprofitable or money-losing drilling business. In these cases, depreciation deductions spread over a number of years might prove more rewarding. On the downside, all those expensing options require the drilling business to “recapture” or pay back amounts written off if the equipment or other property is sold. Under the recapture rule, to the extent the drilling operation has had a business property net loss within the previous five years, any business property net gain must be treated as ordinary income instead of long-term capital gain. Utilizing the advice of a qualified professional when selling, swapping, abandoning. or turning it over to the operation’s owner, manager, or key employee is important. Waiting until after the transaction or until the tax returns are being prepared severely reduces the options for reducing or deferring taxes. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com
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