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If you're not sure how to deduct debts you think are doubtful, read Jacob's story

by , 03 June 2014
According to SARS, a debt is doubtful if it has passed the settlement date and you've tried everything to collect it, but all your efforts have failed.

The good news is, you can deduct debts you think are doubtful. This is good news as it'll help you minimise your tax bill.

But, how do you go about deducting debts you think are doubtful? Jacob's story below will show you exactly what to do.

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Think a debt is doubtful but don't know how to deduct it? Use Jacob's story as a guide

The Practical Tax Loose Leaf Service explains that Jacob, a cleaner, cleans carpets, tiles and walls for his customers.

At the end of the tax year, he still had outstanding monies owed to him by a number of customers. From past experience, he doesn't expect to recover the greater part of these monies.

For tax purposes, he has to declare the total income that accrued to him despite the fact he hadn't received the income yet.

To do this, Jacob draws up a list of all debtors, with the details of each customer and amounts they owe, which he's doubtful about recovering. The total of this list amounts to R160 000.

This means, Jacob is entitled to deduct 25% of this amount (R40 000) from his income as being doubtful.

But, that's not all. Keep this important point in mind when deducting doubtful debts…

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Legally pay less tax

139 reasons SARS doesn't want you to see this.

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Do this one important thing when you deduct debts you think are doubtful

You must include any amount of the doubtful debts allowed as a deduction in your income in the following year.

In we use the above example, it means, in the following tax year, Jacob has to add the R40 000 he deducted to his income.

It's that simple. We hope Jacob's story has shed some light on how to deduct debts you think are doubtful.

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