While bad debts affect your sales bottom line, it can also affect the sales and use tax that you report to the taxing authority.
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- When creating your bad debt write-off policy, do not forget the sales tax ramifications, especially if you are an accrual basis taxpayer.
- When making adjustments relating to bad debts, make sure that it is very clear which bad debt(s) is being written off.
- The customer’s name(s), invoice number(s), invoice date(s), amount, etc. associated with the bad debt write-off should be readily identifiable.
- Having a clear trail of what comprises the adjustment is very important in an audit context.
- Also, in some jurisdictions, you must also have proof that the bad debt was written off on your federal income tax return, for the taxing authority to deem the write-off to be valid. Research what is applicable in the jurisdictions where you conduct business.
More Tips in The Sales Tax Sisters Academy
Our mission to provide a resource so business owners, accountants and bookkeepers can understand sales & use tax compliance. We know that sales and use tax laws are not the easiest to understand. Our focus is on empowering you with a framework and general understanding, so you know what questions to ask and where to go to get the information you need to stay on the right side of sales and use tax compliance.