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Three key points you need to know about claiming a bad debt deduction

by , 10 July 2014
Bad debt is money someone owes your business and other income that's accrued to you (e.g. interest charged on the overdue account) as a result of the debtor not paying the debt due.

The good news is when it comes to bad debts, you can claim a bad debt deduction.

Continue reading to find out three key points about claiming a bad debt deduction so you can improve your company's cash flow.

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Three 'must know' points about claiming a bad debt deduction

Point #1: According to the Practical Tax Loose Leaf Service, you can deduct bad debts if:

  • Money is due to you;
  • The outstanding amount was originally included in your taxable income in any previous year of assessment; and
  • 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.

Point #2: When you claim your bad debt deduction, you must give SARS a statement which has the following five points:

  1. The name of the debtor;
  2. The date you incurred the debt;
  3. How you incurred the debt;
  4. Evidence that the debt was incurred in production of income; and
  5. Reasons for regarding the debt as irrecoverable.

Point #3: SARS won't allow a bad debt 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.

Well there you have it: We hope these three points will help you claim a bad debt deduction without any hassles so you can improve your company's cash flow.

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