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Thread: Bad Debts

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    Bad Debts

    Hi, I would like to know more about bad debts and income tax. We have a client who owes us money, my accountant says that if we create a Provision for Bad Debts in the balance sheet SARS will only allow us 25% as a tax deduction. There is a court case pending and this could take another year for all we know, can I write off this debt in our books or will this create a problem for the future court case? I have also asked the question to our attorney, but they can't answer me right away as they are not familiar with tax law.

    Obviously we can't and don't want to pay tax on this amount. I have already paid the VAT on the invoice and would also like to claim that amount back as it is detrimental to our cash flow. Any advice please? Thank you.

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    I stand to be corrected, but you can write off a bad debt. The fact that it is going to court does not mean that you will be paid.
    On the VAT form there used to be, I have not seen one now for many years, a provision for bad debts, and also bad debts recovered.

    I am not sure of the exact procedure, but a credit entry including VAT to the value of the bad is created, and off set to the outstanding amount. This clears the account as far as the balance sheet is concerned, the VAT is then entered under the Bad debt VAT column as a credit.

    If the debt is paid in the future, then a new invoice is created including VAT to the amount received against the bad debt entry on the balance sheet, and the VAT of this recovered debt is then entered onto the VAT form under bad debt recovered.

    Please note that this is what I have done years ago when I was faced with this dilemma. It is best cleared up with your auditor on the exact procedure.
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    Thank you, that makes perfect sense. I will consult my other auditor as well on the exact procedure.

    Have a lovely afternoon.

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