You go to great lengths to chase up outstanding amounts from clients and customers. But some debts are just impossible to recover. This means your cash flow will suffer!
But there's good news.
You can claim a doubtful debt allowance and get back 25% of the bad debts you've incurred in the last year. Thanks to SARS, you can claim tax and Vat allowances and deductions on your bad debts, and save your business thousands!
Read on how you can correctly claim bad debts as a deduction.
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So what is a doubtful debt and how can I benefit from it
A doubtful debt is where debt has passed the settlement date and initial efforts to collect have failed.
An allowable deduction for doubtful debt is subject to the discretion of SARS. To apply for this deduction, you must submit a detailed list of doubtful debts together with your annual tax return.
In practice, SARS allows 25% of doubtful debts as a deduction.
Just make sure you include any doubtful debts that SARS allows you to deduct, in your income the following year.
Of course, SARS being SARS, there are a few hoops you have to jump through before you can claim the allowance.
To qualify for the doubtful debt allowance, you must be able to prove you've made some effort to collect the outstanding amounts. That's why it's a good idea to set up a doubtful debt policy document.
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What should your doubtful debt policy contain?
This policy should contain:
Your company credit policy indicating terms of payments;
Possible actions to collect outstanding amounts;
Possible actions where either the debt is possibly not recoverable or legal action is to be pursued to aid the collection; and
Treatment of further dealings and sales with the defaulting debtor, such as suspending further credit and sales to that debtor in an effort to limit possible losses.
You should also:
Levy interest on overdue accounts;
Perhaps offer settlement discounts;
Send letters of demand; and
Pursue legal actions.
This justifies your claim to SARS that the debt is potentially irrecoverable.
Develop these policies today, if you don't already have them, and make the most of this doubtful debt allowance to save money.
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