Bad debts arise when you offer credit to you clients and customers during the normal course of business but you cannot recover the same back from them. But, you cannot avoid offering credit because it helps to increase sales. At the same time, some of your clients may not be able to repay you for their purchases. It is an inevitable situation especially with this kind of economy. In some cases the situation may get so out of hand that you are forced to write off your past dues.

At KGRN Accounting Associates, Dubai, we have managed the financial complexities of many organizations. As a result, we have been able to determine when and how exactly you need to let go of debts that you cannot recover.

Qualifying for Deductions

In the event of bad debts, you may qualify for deductions. But, for that you need to have bad debts which are totally unrecoverable or partially unrecoverable (meaning, you may receive only part of the amount due to you). You will have to prove the worthlessness of your debt. You need to show that the debt is indeed genuine and uncollectable. To do that you will need:

– A real copy of the invoice for the product or service purchased on credit, as well as proof of the fact that you company delivered to the client or customer the goods or services they ordered.

– You will also require proof of you reasonable number of attempts to collect the debt money owed to your business organization. The filing of a lawsuit is not essential to qualify for deductions. Neither is the use of a collection agency compulsory. However, you are required to provide details of your collection efforts. You will need to provide copies of all the collection letters you sent the client. Documenting your phone calls to the customer for collection will also serve as proof of your attempts to recover your dues.

When do You Claim the Deduction?

Claims for the deduction can be made by your establishment during the dame year when the bad debt came into being. That is, when the debt amount payable to you was declared partially worthless (where you agreed to the payment of an amount less than the original amount due) or completely worthless.

It is also possible to write off your company’s past due receivables from previous years, on the claim that the worthlessness of the debt was not immediately apparent your firm. Even if your organization failed to write off bad debts from previous years, you can still amend your tax returns in order to obtain the bad debt deduction for the correct year. But usually past debts are written off in the current year. Provided the unrecoverable debt amount is small and you treat all write offs consistently. So make sure you have a written policy ready for this and also make sure you stick to it.

*Note – Bad debt deductions are not available to taxpayers who make cash payments unless the value of the note is included in their gross income.

To acquire the best accounting solutions, audit reviews, report preparation services and assistance with business growth get in touch with KGRN Accounting Associates. We can meet diverse needs with comprehensive accounting solutions for your UAE-based company.