Good news! You can deduct bad debts if you meet these three conditions
If a debtor owes you money and other income has accrued to you (e.g. interest charged on the overdue account), but he doesn't pay the debt and you have little or no chance of recovering the outstanding balance, it's called a 'bad debt'.
Bad debts can lead to bankruptcy because it means people who owe your business money aren't paying you back. As a result, you struggle to run your business efficiently.
But the good news is you can deduct bad debts. Before you do, just make sure you meet these three conditions...
Three conditions you must meet before your deduct bad debts
Experts behind the Practical Tax Loose Leaf Service say you can only deduct bad debts if:
Condition #1: Money is due to you;
Condition #2: The outstanding amount was originally included in your taxable income in any previous year of assessment; and
Condition #3: You've concluded there's little or no possibility of recovering the outstanding balance or the debtor has either been sequestrated or liquidated during that specific year of assessment.
If you tick these three boxes, congratulations, you can deduct bad debts.
Now take a look at what you must give SARS when you when you claim your bad debt deduction.
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When you claim your bad debt deduction, give SARS a statement that has the following five points:
The name of the debtor;
The date you incurred the debt;
How you incurred the debt;
Evidence that you incurred the debt in the production of income; and
Reasons why you believe the debt is irrecoverable.
Keep in mind that SARS won't allow the deduction if there's a strong possibility that you'll recover the amount from another party who gave you a guarantee or stands as surety. So make sure the debt is bad before you claim a deduction and make sure you meet the above conditions.