Top company tax tip: Here's how to deduct bad debts
Bad debt is a sad reality of any business. No matter how exclusive your clientele is, sooner or later someone just won't pay. Your business must go on under the weight of bad debt. But under the right circumstances, you can deduct this and lighten the load on your company. Read on to find out how...
Even though SARS is getting stricter by the year, they aren't completely heartless. They'll let you deduct bad debt as long as it meets their requirements.
The difference between bad debt and doubtful debt
The Practical Tax Loose Leaf
defines bad debts as "a debt that is due to you, that is irrecoverable." That means you have tried everything in your power to recover the debt and it hasn't worked. You can deduct bad debts in their entirety.
If the debt is just doubtful, that means you can deduct 25% of the debt... But the deduction is totally under SARS' discretion. If you don't think recovery is likely, you can approach SARS with your amount of doubtful debt. But be warned: If the debts do come through in the next year, you must add the deduction to that tax years' income.
When can you deduct bad debts?
SARS lets you deduct bad debts if...
1. The bad debt is due to you
2. The amount is included in your income for the year of assessment, or was included in a previous year's assessment
3. The debt became bad during the year of assessment
So there you have it – you can declare a bad debt as long as it meets SARS' requirements. As long as the debt is bad and not just doubtful, you can deduct it in full.
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