Bad Debts – When To Write Off
Practically every small business has receivables that it cannot obtain from clients. There are only a few small businesses that can truly say they do not have to deal with these receivables. A tax deduction is that glimmer of hope that everybody in the small business scene would have if they are pondering what to do with those uncollected receivables.
When Should You Write Off Bad Debts?
As a small business owner, you are legally allowed to write off bad debt losses pursuant to a few requirements. There are three requirements that need to be met so that a small business would be able to claim this tax deduction:
The existence of a legal relationship between the small business and debtor;
The receivables do not have any worth.
There has been an actual, true loss incurred by the small business.
Proving there is a legal relationship between the small business and debtor is fairly simple. The only proof you need is proof that the debtor is legally required to make payment to your company. Invoices or simple contracts are usually enough to validate the veracity of such a legal relationship between debtor and business, and most businesses would issue these anyway. If your company is not in the habit of legally validating business relationships in writing, such habit must be formed immediately.
Proving receivables are worthless is slightly more complex. A small business would be required to corroborate that the debt is now at a state of worthlessness from here on in. Another piece of information you would need to prove would be the efforts you took to collect these receivables, but you need not go to court so that this particular requirement can be completed. If the debtor had gone bankrupt, this would be the most common instance where you need to meet such a requirement.
While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. A loss is, according to the tax code, an amount that is never collected despite being filed under the income category. Typically, this is quite common in business, as manufacturers often provide products on credit to different department stores, retailers and the like. If the retailer files for bankruptcy, the manufacturer stands to incur a severe loss as a result.
It is sad to note that it is virtually impossible to claim loss if you use cash accounting in your business and provide hourly services. The IRS does not consider the expenditure of time and effort to be a sustained economic loss.
Small businesses suffer all to often from uncollected receivables. If this applies to you and you were unable to claim these losses as a tax deduction during the last three years of filing, then you can get a refund by filing amended tax returns.
Guests will love this blow up mattress during their stay.
Related posts:
- Automobile Tax Expenses – What Are They?
- Can A Cpa Help With Taxes And Tax Accounting?
- Tax Deductions – What’s In It For You As A Homeowner?
- 7 Reasons You Should Not Be Late Filling Your Income Tax Returns
- Tax Write-Offs For Your Business
- The Common Man’s Guide To Reducing Tax Payments
- Learn More About Home Office Tax Expenses
- A Brief Guide to the Role of the Insurance Adjuster
- All about Capital Assets
- Legal Continuing Education Requirements for Practicing Lawyers