Get Regulation Fi 59-94 - Modifications Of Bad Debts And Dealer ...

Doubtful debt – is a receivable amount that might eventuate to be a bad debt in future. Doubtful debt often represents a mere accounting provision and is not deductible for tax purposes for the current financial year but may evolve into a bad debt the following year.

Provision & Treatment As per section 36(1) of the Income Tax Act, 1961, only banks and financial institutions are allowed a deduction in respect of the provisions made for bad and doubtful debts. Other assessees are not permitted to claim the deduction on the provision of bad debts.

There are two kinds of bad debts – business and nonbusiness. You can deduct it on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return. The following are examples of business bad debts: Loans to clients, suppliers, distributors, and employees.

Any recovery of a non-trade debt, previously written-off as bad or specific provision for bad debt has been made, should be shown as income in the Income Statement for the period in which it is received. Such recovery would be capital receipts and are not taxable.

Bad debt relief is given in the period that the business decides a debt is irrecoverable, preferably in the same period that the invoice was issued; this way tax will not be payable on unpaid invoices.

Provision & Treatment As per section 36(1) of the Income Tax Act, 1961, only banks and financial institutions are allowed a deduction in respect of the provisions made for bad and doubtful debts. Other assessees are not permitted to claim the deduction on the provision of bad debts.

Bad debts must be proved by the Taxpayer to have become bad while doubtful debt is deductible when it is established to the satisfaction of the Board of the Respondent.

Include the income in your tax return You can only claim a bad debt deduction for amounts you have included in your assessable income, either in your tax return for the year you claim the deduction or in an earlier income year.