Key factors for rescuing a bad debt deduction.
It is very often the case that unpaid debts owed to a business can have a significant impact on cash flow and the ongoing profitability of a business. In a taxation context the characterisation of a particular debt as either “doubtful” or “bad” is key as to whether or not the writing off of that debt would be deductable.
Generally, the characterisation of a debt would be premised on the following principals:
Doubtful debt – is a receivable amount that might eventuate to be a bad debt in the future. Doubtful debt often represents a mere accounting provision and is not deductable for tax purposes for the current financial year but may evolve into a bad debt the following year.
Bad debt – is a receivable amount that has been identified as not collectable and on being written off may well be deductible for tax purposes.
