” I don’t need to hire a collection agency because I will write it off as bad debt and take the tax deduction”
Have you ever heard a small business owner say this? I sure have.
Sometimes a business will “write off” an amount owed to them as an accounting function, to begin the collection process. The business has tried to recoup the money and cannot, and is isolating those sums it wishes to refer for outside collection. However this sort of “write-off” is not intended to be used for tax purposes.
Small business owners who believe that they will receive favorable tax consequences for writing off bad debt may be making several mistakes. First, many small business owners report their business sales on a cash basis, which means that they report income as they receive it. If your business is on a cash basis, you cannot receive any tax benefit for bad debt write off. Even if you are a bit larger company (say, over $3 million in sales) and use and accrual basis (income counted when earned, whether or not paid), you need to show a reasonable effort to recover the funds, and it is questionable that any tax benefit received will match the benefit of having the funds reruns to you, even in part.
The best way for a small business to recover bad debt is to focus on procedures that reduce bad debt, promptly attempt to collect past due accounts and get outside from a collection agency or attorney when they need it.
So, a business that is “writing off” bad debt is like throwing money away. Money that was earned, and money that is needed to grow your business and pay your employees.
Debt collection must be a part of your ongoing activities, for the health of your business. What are you doing to reduce bad debt in your business? We would love to hear from you in the comments section below.
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