33 OCTOBER 2023 WorldWide Drilling Resource® www.starironworks.com 257 Caroline Street Punxsutawney, PA 15767 800-927-0560 • 814-427-2555 Fax: 814-427-5164 SERVING THE WATER WELL INDUSTRY Serving the Drilling Industry Drilling Into Money Not Boring by Mark E. Battersby Repair, Replace or Not for Maximum Tax Savings The tax write-offs for what is or what isn’t a repair in a drilling operation or business has long been an issue with the Internal Revenue Service (IRS). Although the tax rules are pretty cut-and-dried when it comes to expenditures for repairs, replacements, improvements, or routine maintenance, it is the actual definition of each activity which often causes the problem. The IRS’s usual definition of a repair is an expenditure which keeps the property in normal operating condition. A capital improvement, on the other hand, is defined as an expense which either extends the useful life of the property, or allows it to perform a new function. Expenditures for regularly scheduled, routine maintenance on property or equipment, including inspection, cleaning, testing, replacement of parts, and other recurring activities performed to keep the property or equipment in its ordinary efficient operating condition don’t, according to the rules, need to be capitalized. Safe harbors are “loopholes” built into the tax regulations for the treatment of specific expenditures. One such safe harbor allows purchases of either materials or supplies for use in the drilling operation - ones costing less than $200 - to be treated as expenses and currently tax deductible. Also, in the tax rules is a safe harbor for amounts paid to acquire or produce tangible property. The so-called “de minimis safe harbor” is available to drilling professionals and their operations which do not have an “Applicable Financial Statement” and allows them to immediately expense expenditures of less than $2500 per invoice. For those drilling operations which do have an “Applicable Financial Statement” (generally an audited financial statement), the threshold is increased to $5000 per invoice - regardless of whether the expenditure meets the definition of a capitalizable expense or not. On the other hand, immediate write-offs, whether labeled as repairs, maintenance, or accelerated depreciation, are not of much use to any drilling operation, supplier, distributor, or manufacturer without taxable profits from which to deduct them. After all, very few businesses will actually benefit from more losses. It is the drilling operation’s owner or manager who has the discretion of determining if expenditures should be capitalized and depreciated over time, or whether the cost should be fully expensed and deducted in the current tax year. Obviously, the decision to deduct or capitalize may require professional help. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com
RkJQdWJsaXNoZXIy NDk4Mzk=