Bad Debts - Save Money!

This is one of a series on how to handle items that affect the "basis" of tax.

I was doing a seminar a few months ago in and, near the end of the day, one of the participants said, “Jim, you just saved me $30,000.” He had just written off a $500,000 taxable sale as a bad debt. And he had just realized that he could reduce his taxable sales by that amount. Since the tax rate in his state is 6%...well, you do the math. I had been talking about bad debts and their effect on sales and use taxes.

If you sell something and charge tax, and the customer never pays you for the purchase, you’ll eventually write it off. Almost every state gives you the ability to recover the sales or use tax on that bad debt. They either allow it through a credit, refund or, most commonly, by simply deducting the bad debt from your taxable sales in the month you write it off. The method is usually clearly stated someplace in the instructions or law.

Because the people doing the sales and use tax return are usually NOT in the accounts receivable department, they probably don’t even think about bad debts, let alone their impact on the return. If you’re preparing the return, and you’re not adjusting for bad debts, then you’re throwing money away. If you’re not the one who prepares the return, then check out what YOUR company is doing. I won’t say you’ll save $30,000, but you’ll probably pay for your subscription to this blog.

Sales Tax Guy