Businesses can only obtain income tax deductions for bad debts where various conditions are met.
A deduction will only be available where the debt is still in existence at the time it is written-off. Thus, if the debt is forgiven or compromised before it is written-off as bad in the accounts no deduction will be available.
Moreover, the debt must be effectively irrecoverable and written-off in the accounts as bad in the year in which the deduction is claimed. The amount representing the bad debt must also have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money lending business. Certain additional requirements must be met where the creditor is either a company or trust.
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Tony has 33 years’ experience as an accountant, and 13 years’ experience as a CPA. His first 18 years’ experience involved financial, management and operational accounting roles at a senior management level, in the security, transport, and forensic accounting industries