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Turn bad debts into tax deductions

by , 12 August 2015
You've probably came across a situation where your customers can't settle their debt or refuse to pay their outstanding debt.

Despite numerous attempts chasing customers to recover payments, the truth of the matter is, your business will never see that money again.

This causes severe financial distress on your business and your cash flow suffers.

But the good news is you can turn bad debts into tax deductions. Let's see how.

****************Hot off the press****************

Get back 25% of the bad debts you've incurred in the last year, thanks to this SARS tax allowance

Small businesses are going to great lengths to chase up outstanding amounts from clients and customers. Some debts will be impossible to recover, unfortunately that means your cash flow could suffer. But there's good news. You could claim a doubtful debt allowance, by deducting 25% of the debts....

Plus discover 46 other ways to get your money back from SARS through allowances and deductions.

Read on to find out more!

How to turn bad debts into tax deductions

SARS differentiates between doubtful debts and bad debts.

A doubtful debt is one that's passes the settlement date and your efforts to collect the money has failed.

A doubtful debt turns into a bad debt the following financial period. By this stage you've tried numerous times to recover your money but there's very little or no possibility of ever recovering the money.

So when it comes to doubtful debts, you can claim a tax allowance to help your businesses cash flow.

For bad debts you can claim a tax deduction.

Let's look at what SARS requires from you.

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Prove to SARS that you have policies in place to tackle bad debt early

Its poor business practice not to have a bad debts policy in place from the start. SARS is also less sympathetic to you when you approach if for an allowance or a deduction.

Your policy must contain the following:

  • Credit policy with terms of payment;
  • Actions to collect outstanding amounts;
  • Actions you'll take to recover the money or the legal action to aid collection; and
  • A clause you'll suspend any business with the deducting debtor, except on a 'cash on delivery' basis.

Try to collect the debt yourself

SARS needs to see you've made some effort to collect money from debtors, before it will grant you an allowance or deduction.

So show SARS you have:

  • Levied interest on overdue accounts;
  • Perhaps offered settlement discounts to encourage payment;
  • Sent reminders to the debtors;
  • Sent letters of demand;
  • Phone the debtor to chase payment; and
  • As a last resort, turn to lawyers for help.

So you have done all this, but still haven't recovered what's owed to you. Then apply for a doubtful debt allowance or in case of bad debt, a deduction.

Doubtful debts: how to claim an allowance from SARS.

This is easy. When you claim an allowance on your tax return, SARS will request a detailed list of the doubtful debts.

Make sure you have a document for each doubtful debt with the following:

  • Who the debtor is;
  • When the debt incurred;
  • How did the debt occur;
  • What actions you took to recover the money; and
  • Reasons why you believe the debt could go bad.

So if you have done all of the above along with a list of debtors, then you qualify for a 25% of doubtful debts from SARS.

P.S. Discover 46 other ways to get your money back from SARS through allowances and deductions…

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