Construction and Directional Drilling Tax Deductions You're Probably Missing

Disclaimer: The information on this website (including all examples, explanations, and content) is for general informational purposes only and should not be considered tax, legal, or financial advice. Always consult with a qualified professional about your specific situation.

The $40,000 Blind Spot in Construction and Drilling Accounting

You spec'd drilling equipment. You calculated costs. You bid the job to make margin. You completed the work and invoiced.

Then you handed your bank statements to an accountant and paid taxes on the profit.

What if I told you that you're probably overpaying taxes on that same profit because you're not capturing every legitimate deduction available to your specific industry?

Construction and drilling businesses have unique tax situations. The IRS understands this. There are specific deductions written into the tax code for your industry.

But most construction and drilling businesses are only capturing 60-70% of the deductions they actually qualify for.

Here's what you're leaving on the table and how to claim it properly.

Why Construction and Drilling Deductions Are Different

Construction and drilling aren't like consulting or professional services. You have:

Massive capital equipment - Drill rigs, trucks, tools, compressors - these assets depreciate and create deduction opportunities most businesses don't have.

Job-site costs that vary significantly - Every job has different material costs, rental costs, travel costs. These need tracking by project for accurate profitability analysis and tax purposes.

Seasonal work patterns - Some months are booked solid, others are slow. This affects both cash flow and tax planning.

Specialized equipment - Industry-specific tools and machinery that have specific depreciation rules.

Subcontractor relationships - Smaller jobs or specialized work requires subcontractors, creating 1099 and documentation requirements.

Insurance and bonding requirements - More significant insurance burden than typical businesses, with specific deduction implications.

Equipment financing - You're constantly upgrading, buying, financing equipment. The tax implications matter.

The IRS recognizes these realities. But they also expect you to document everything properly.

Deduction #1: Equipment Depreciation (Your Biggest Missed Opportunity)

The opportunity: Drilling equipment, trucks, compressors, tools—these are depreciating assets that create annual deductions.

How most businesses miss this:

You buy a $50,000 piece of drilling equipment. You use it for five years. Then you might sell it or replace it.

What you should be doing: Depreciating it according to IRS rules and potentially accelerating the deduction using Section 179 or bonus depreciation.

The difference:

Scenario 1: No strategy (what most do)

Year 1-5: Equipment depreciates straight-line, $10,000/year deduction
Total deduction over 5 years: $50,000

Scenario 2: Strategic (Section 179)

Year 1: Immediate deduction of $50,000 (up to annual limits)
Tax savings Year 1: $50,000 × 35% tax rate = $17,500
You keep the cash flow benefit AND the tax benefit in Year 1

Section 179 Deduction

What it is: Allows you to immediately deduct qualified business property instead of depreciating over years.

Who qualifies: Most construction and drilling businesses qualify.

What property qualifies:

Drill rigs and drilling equipment
Compressors, generators, pumps
Work trucks and vehicles (with limits)
Tools and implements

Limits to know: There are annual caps on Section 179 deductions ($1,160,000 in 2024, but limits change), and there are overall equipment investment limits that reduce the deduction.

Real example:

You buy $80,000 worth of drilling equipment this year
Using Section 179, you deduct $80,000 immediately (subject to limits)
Tax savings: $80,000 × 35% = $28,000
Without Section 179, you can't deduct the full amount.

Bonus Depreciation

What it is: Allows 100% deduction of qualified property in the year it's placed in service.

Key difference from Section 179: Less subject to limits. Can potentially deduct more total equipment.

When to use: If you're hitting Section 179 limits or if your equipment spending is very high.

Depreciation Recapture

What you need to know: When you sell depreciating equipment, some of the gain might be subject to "recapture" tax at higher rates.

This is why tracking the original cost and depreciation taken is so important. You might sell a truck that depreciated $30,000 and have to recognize that gain when you sell it.

Action items:

List all major equipment purchased in last 3 years with purchase costs
Verify these are being depreciated (not expensed)
Determine if Section 179 or bonus depreciation applies
Calculate the tax impact of different depreciation strategies
Develop a replacement equipment plan that considers tax implications

Deduction #2: Vehicle and Heavy Equipment Operating Costs

The opportunity: Vehicles and heavy equipment used for work generate multiple deductions.

What typically gets captured:

Fuel (usually tracked)
Maintenance (sometimes tracked)
Insurance (usually deducted)

What often gets missed:

Detailed mileage tracking for business vs. personal use
Specialized equipment costs specific to vehicles
Rental equipment for vehicles
Heavy equipment operation and maintenance

Work Vehicle Deductions

If you own work vehicles (trucks, pickups, vans):

You can deduct either:

Mileage method: Track business miles and deduct IRS rate (67 cents/mile in 2024)
Actual expense method: Deduct actual fuel, maintenance, insurance, depreciation, based on business-use percentage

Which is better? Depends on your vehicle costs and mileage. For construction with heavy vehicles and short distances, actual expense often works better.

Example:

You have a $60,000 work truck
80% business use
Depreciation: $12,000/year (assuming 5-year life)
Plus: fuel, maintenance, insurance, registration
Total annual cost: ~$20,000
80% business deduction: $16,000

Mileage method: 15,000 business miles × $0.67 = $10,050

The difference: Actual expense method captures $5,950 more in deductions annually.

Heavy Equipment Operation

For drill rigs, compressors, and specialized equipment:

Fuel to operate equipment
Maintenance and repairs
Operator labor (separate from general labor)
Rental of specialized equipment for specific jobs
Replacement parts

Each of these should be tracked separately to understand job costs and for proper deduction capture.

Action items:

Determine mileage method vs. actual expense for vehicles
Begin detailed mileage tracking for business vehicles
Track fuel and maintenance by vehicle
Separate heavy equipment operating costs by type of equipment
Document business-use percentage for any personally-used vehicles

Deduction #3: Job-Site Materials and Supplies

The opportunity: Every piece of material, every rental, every supply on a job site is deductible.

What usually happens:

You track major material costs
Some job-site rentals get captured
Smaller supplies and consumables get missed

What's deductible:

Drilling fluid and additives
Completion materials
Pipe and casing
Wellhead equipment and components
Rental equipment for specific jobs
Fuel for job-site operations
Consumable supplies

Why tracking matters:

Not just for tax deductions, but for job profitability
You need to know if jobs are as profitable as you thought
This connects to pricing future similar jobs
This determines which types of work you should pursue

The challenge: Many drilling and construction companies buy materials through one account and don't clearly track which job materials belonged to which project.

Come tax time, the total material cost is there, but nobody can clearly show which jobs used what materials. This makes job costing impossible and creates audit risk.

Real example:

You spent $250,000 on drilling materials and supplies for the year
Your accountant deducts $250,000 on your return
If audited, the IRS asks: "Can you show how these $250,000 in materials relate to your invoiced revenue of $1.2 million?"
Without job-level tracking, you can't answer clearly

Action items:

Implement job-level material tracking in your bookkeeping
Tag every material purchase to the specific job it's for
Create material budgets for different job types
Compare actual vs. budgeted materials to understand profitability
Monthly reconciliation: total material costs should roughly align with invoiced revenue

Deduction #4: Subcontractor Payments and 1099 Management

The opportunity: Subcontractor payments are deductible business expenses. But they come with specific documentation and reporting requirements.

What you need to know:

Subcontractor payments are fully deductible - Any amount you pay to subcontractors or independent contractors for work on your projects is a business deduction.

But you have reporting requirements:

Anyone paid $600+ in a calendar year must receive a 1099-NEC
You must file 1099s with the IRS by January 31
Missing 1099s or having incorrect information creates penalties
The IRS cross-checks these against contractor personal returns

Common mistakes:

Paying contractors without documenting the payment
Not issuing 1099s to contractors over $600
Issuing 1099s with incorrect information (name, address, SSN/EIN)
Misclassifying subcontractors as employees (costing thousands in back taxes and penalties)

The classification issue: This is critical for drilling and construction.

Texas is particularly strict on worker classification. The state aggressively audits construction companies claiming independent contractor status.

To prove independent contractor status, you need documentation showing:

The person operates their own business
They're not under your direct control (for drilling, this is nuanced)
They have the ability to profit or lose
The relationship isn't ongoing and indefinite

Simply paying someone without proper documentation and calling them a 1099 contractor doesn't make them a contractor.

Real case example:

Construction company pays drilling crew members $500-$1,000 per week
Calls them subcontractors (1099s)
Company provides equipment, trucks, supervision
IRS audit determines they're actually employees
Result: Back payroll taxes, workers comp penalties, unemployment tax penalties = $50,000-100,000+

How to document properly:

Written contractor agreement (basic contract defining relationship)
Invoice from contractor (not just check request)
Evidence of independent status (business license, insurance, other clients)
Clear documentation of work performed

Action items:

List all subcontractors paid over $600 last year
Verify 1099s were issued correctly
For any contractors paid regularly, review the relationship to ensure genuine contractor status
Implement contractor documentation process going forward
Create a contractor agreement template for consistent documentation

Deduction #5: Health Insurance (Surprisingly Often Missed)

The opportunity: Health insurance premiums can be a massive deduction if structured correctly.

The problem most owners face:

Many construction and drilling business owners pay health insurance personally. It comes out of after-tax income. They don't realize it can be structured through the business as a deduction.

Real numbers:

Personal payment (currently):

Family health insurance: $15,000/year
This comes out of after-tax income
Net cost to you at 35% tax bracket: $15,000 (you already paid taxes on this money)

Business deduction (if structured correctly):

Same $15,000 insurance premium
But it's a business deduction
Tax savings: $15,000 × 35% = $5,250/year

That's $5,250 annually, just from restructuring something you're already paying.

Self-Employed Health Insurance Deduction

What it is: Self-employed individuals can deduct 100% of health insurance premiums for themselves and their families.

Who qualifies:

Sole proprietors
Partnerships
LLC members
S-Corp shareholders (with some limits)

What's deductible:

Health insurance premiums
Dental insurance
Vision insurance
Long-term care insurance

What's NOT deductible:

Medicare premiums (different deduction)
Supplemental insurance for Medicare (different deduction)
Health insurance if you have an employee group health plan

How to implement:

Establish a business health insurance policy (or move personal to business name)
Pay the premium from the business account
Deduct on Schedule C (or business return)
You also get to deduct the employer portion of self-employment tax

This is different from offering group health insurance to employees (which also reduces payroll taxes but is set up differently).

Action items:

Determine current annual health insurance costs
If personal, move to business payment
Deduct on your business return
If group plan for employees, coordinate with payroll processor
Track all health insurance premium payments for tax purposes

Deduction #6: Insurance and Bonding

The opportunity: Construction and drilling require significant insurance. All of it is deductible.

What's deductible:

General Liability Insurance - Coverage if your work injures someone or damages property. Premium is fully deductible.

Workers Compensation Insurance - Required if you have employees. Premium is fully deductible (in most states).

Commercial Auto Insurance - Insurance for work vehicles. Premium is fully deductible.

Equipment Insurance - Specific insurance for drill rigs and specialized equipment. Fully deductible.

Contractors Bonding - Performance bonds or payment bonds required for many jobs. Fully deductible.

Professional Liability - If applicable to your services. Fully deductible.

Pollution Liability - For drilling operations. Fully deductible.

The Challenge

Many owners pay insurance but don't clearly track it or don't realize different policies cover different things.

Action items:

List all insurance policies and annual costs
Verify each is being deducted as a business expense
Separate by type (liability, vehicle, equipment, bonding)
Review coverage levels with your broker
Ensure all premiums are paid from business account (not personal)

Deduction #7: Office, Equipment, and Tool Expenses

The opportunity: Office supplies, tools under capitalization limits, and equipment purchases create deductions.

What's deductible:

Office Supplies:

Paper, pens, computer supplies
Office furniture and shelving
General office equipment

Tools:

Specific tools under $2,500
Multi-piece tool sets
Power tools and equipment

Equipment Under Capitalization Limits:

Items under $2,500 are typically deducted immediately
Items over $2,500 might be depreciated or Section 179 deducted
Limits and rules vary

Computer and Software:

Computers and monitors
Software licenses and subscriptions
Accounting, project management, field software
Cloud storage and services

Specialized Equipment:

Surveying equipment
GPS and navigation systems
Communication equipment

The Challenge

Small tools and supplies add up to thousands annually, but they're easy to miss if you're not tracking them systematically.

Real example:

You spend $50 on tools or supplies at a local store, paid with personal card
Small purchase, easy to forget
By year-end, you've made 30 such purchases = $1,500
None captured because "too small to track"
That's $525 in lost tax deductions at 35% rate

Action items:

Use business credit card for all tool and equipment purchases
Categorize purchases clearly in bookkeeping
Reconcile credit card to purchases monthly
Total annual tool and equipment spending quarterly
Identify any major purchases that might qualify for Section 179

Deduction #8: Professional Services

The opportunity: Any professional service you pay for is deductible.

What's deductible:

Accounting and bookkeeping (like this!)
Legal services (business-related)
Tax preparation
Consulting and advisory
Safety training and consulting
Engineering consultants
Payroll processing services
Software support and training

Why it matters:

These are ongoing costs that get missed
Subscriptions and recurring services are easy to forget
The total often adds up to thousands annually

Real example:

Bookkeeper: $400/month = $4,800/year
Tax prep and planning: $2,500/year
Legal consultation: $1,500/year
Software support: $600/year
Total: $9,400/year in deductible professional services

If you're capturing these, great. Many owners aren't tracking them systematically.

Action items:

List all professional services paid in last year
Verify each is being deducted
Categorize by type
Create a system for capturing new professional services

Deduction #9: Equipment Rental and Temporary Equipment

The opportunity: Equipment rentals for specific jobs are fully deductible.

What's deductible:

Crane rentals
Compressor rentals
Power equipment rental
Lift equipment
Temporary scaffolding
Support equipment for specific jobs

Why it matters:

Rentals are variable costs that scale with job volume
Easy to track by job (which helps job profitability analysis)
Sometimes alternative to owning (financial decision)

Action items:

Track equipment rental costs by job
Total annual rental costs
Verify these are being deducted
Use rental data to make equipment ownership decisions

Deduction #10: Continuing Education and Certifications

The opportunity: Industry training, certifications, and continuing education are deductible.

What's deductible:

Safety certifications (OSHA, etc.)
Specialized drilling certifications
Equipment operation certifications
Industry conference attendance
Training courses for yourself or employees
Cost of travel to training events

Why it matters:

Required for maintaining licenses
Required for industry standards
Improves employee capabilities
All costs are business deductions

Real example:

Safety training for crew: $300/person × 10 people = $3,000
Your advanced drilling certification: $1,500
Industry conference: $2,500 (including travel)
Total: $7,000 in deductible training

Many owners don't capture training costs systematically.

Action items:

Track all employee training and certifications
Track your own industry training
Capture conference and travel costs
Deduct as business expenses
Document for tax purposes

The Documentation Requirement

Here's the critical piece: All of these deductions require documentation.

The IRS doesn't just accept your word. They want:

For vehicle deductions:

Mileage logs with dates, destinations, business purpose
Receipts for fuel and maintenance

For equipment:

Original purchase receipts
Depreciation schedules
Proof of business use

For job costs:

Invoices from suppliers
Subcontractor agreements and 1099s
Job-specific cost documentation

For professional services:

Invoices and payment records
Scope of services documentation

For training:

Course descriptions
Certificates of completion
Travel documentation

Without this documentation, the IRS can disallow deductions if you're audited.

Your bookkeeping system should capture:

What was purchased/paid
How much was paid
When it was paid
What it was for (business purpose)
Which job or category it relates to

Real-World Implementation

Here's how to actually capture these deductions:

Month 1-2: Audit Current Deductions

Pull last year's tax return
Compare deductions to actual spending
Identify what's missing

Month 3: Implement Tracking

Set up job-level coding in bookkeeping
Implement equipment register
Create contractor tracking spreadsheet
Set up insurance tracking

Months 4-12: Discipline

Weekly: Log expenses to jobs/categories
Monthly: Reconcile and verify
Quarterly: Total by deduction category
Year-end: Prepare documentation

Month 13: Tax Planning

Meet with tax preparer
Calculate total deductions
Model tax liability
Plan next year

The Bottom Line

Construction and drilling businesses have unique deduction opportunities that most other businesses don't have.

The difference between capturing 70% of available deductions vs. 95% is often $15,000-25,000 annually in tax savings.

Over a decade, that's $150,000-250,000.

But capturing these deductions requires:

Knowing what's deductible (this post covers it)
Tracking systematically (your bookkeeping system)
Documenting properly (receipts, contracts, logs)
Planning strategically (coordinating with tax preparer)

Most construction and drilling companies do step 1 partially. They do steps 2-4 poorly or not at all.

That's why they're leaving money on the table.

Getting Help

If you're doing basic bookkeeping yourself or through a generalist, you're probably missing industry-specific deductions.

A bookkeeper familiar with construction and drilling operations knows what to look for, how to track it, and how to document it for tax purposes.

The investment in proper bookkeeping and tax planning typically pays for itself in the first year through deductions you would have missed.

For construction and drilling businesses across Texas, we specialize in exactly this kind of detailed deduction capture and tax optimization.

We know the unique cost structure of your operations. We know what the IRS expects to see. We know how to document it properly so the deductions stick if you're audited.

More importantly, we help you understand your real job profitability so you can make better pricing decisions going forward.

Ready to stop leaving deductions on the table? Contact us here to discuss how we can help you capture every deduction your drilling or construction business qualifies for.