Deduction for Doubtful Debts – Clearing the Myths

Time and again, taxpayers were shocked when they were told that they could not claim tax deduction on the bad debts written off or the provision for doubtful debts in their tax returns. The law on deduction of irrecoverable debt and the Public Ruling (PR) 1/2002 on Deduction For Bad & Doubtful Debts And Treatment of Recoveries are not new and yet many have failed to get their rightful deduction on their bad and doubtful debts.

Law states that Section 34(2) of the ITA provides deduction for a debt which is reasonably estimated in all the circumstances of the case to be irrecoverable. The words “reasonably estimated” connote that a debt does not have to turn completely bad before a deduction can be taken, for as long as the irrecoverability can be estimated justifiably.

First of all, the debt mentioned in the above legislation is of the kind where the amount of such debt has been included in the gross income of the person for the basis period for the relevant YA or for a prior YA, i.e. trade debts. No deduction can be given to non-trade debts, such as staff advances. Continue reading >>>