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Bad Debts

This document defines bad debts as debts that are worthless or uncollectible in whole or in part. To claim a bad debt deduction, the taxpayer must ascertain and demonstrate that the debt is worthless, considering factors like collateral value, the debtor's finances, and likelihood of collection through legal action. The debt must be actually charged off the taxpayer's books. For a valid bad debt deduction, the debt must be a valid indebtedness to the taxpayer, connected to their business, and actually charged off and ascertained to be worthless in the tax year. If the taxpayer benefited from the deduction, any subsequent recovery is included as income up to the prior tax benefit amount.

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154 views

Bad Debts

This document defines bad debts as debts that are worthless or uncollectible in whole or in part. To claim a bad debt deduction, the taxpayer must ascertain and demonstrate that the debt is worthless, considering factors like collateral value, the debtor's finances, and likelihood of collection through legal action. The debt must be actually charged off the taxpayer's books. For a valid bad debt deduction, the debt must be a valid indebtedness to the taxpayer, connected to their business, and actually charged off and ascertained to be worthless in the tax year. If the taxpayer benefited from the deduction, any subsequent recovery is included as income up to the prior tax benefit amount.

Uploaded by

RonHilario
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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BAD

DEBTS
1
DEFINITION OF TERMS
Bad debts shall refer to those debts resulting from the worthlessness
or uncollectibility, in whole or in part, of amounts due the taxpayer
by others, arising from money lent or from uncollectible amounts
of income from goods sold or services rendered

Actually ascertained to be worthless taxpayer must ascertain and


be able to demonstrate with reasonable degree of uncertainty the
uncollectibility of the debt taking into consideration
The value of the collateral
The financial condition of the debtor
Legal action to enforce payment would in all probability not
result to satisfaction of judgment
Amount of debt is insignificant and collection of which through
court action may be more costly 2
DEFINITION OF TERMS (cont.)

Actually charged-off from taxpayers books of accounts

1. The amount lent by the taxpayer which has been recorded as


receivable in its books of accounts actually became worthless at
the end of the taxable year; and

2. It has been cancelled and written-off from the books of


accounts

3
REQUISITIES FOR VALID DEDUCTION
There must be an existing indebtedness due to the taxpayer
It must be valid and legally demandable
It must be connected with the taxpayers trade business or
practice of profession

It must not be sustained in a transaction entered into between


related parties

It must be actually charged off the books of accounts as of the


end of the taxable year

It must be ascertained to be worthless and uncollectible as of


the end of the taxable year
4
REQUISITIES FOR VALID DEDUCTION (cont.)

In the case of banks


Worthlessness and uncollectibility of debt shall be
determined by the CIR based on the grounds herein provided
together with the taxpayers submission of BSP/Monetary
Boards written approval of the writing-off of the indebtedness
from the banks books of accounts

For insurance or surety companies


Receivables can only be written-off and claimed as bad
debts deduction after the company has been declared closed by
the Insurance Commission due to insolvency or other similar
reason

5
TAX BENEFIT RULE
1. At the time the debt has been written-off
It must have been deducted from the gross income on the year the
indebtedness has been written-off
The taxpayer has income tax benefit from the said deduction

2. At the time of recovery


TP benefited from Bad debts recovered shall be included
the deduction as part of the gross income to the
extent of the income tax benefit of such
deduction
TP did not benefit Recovery shall be treated as a mere
from the deduction recovery or return of capital and not
treated as receipt or realized taxable
income 6
ILLUSTRATION

Case No. 1 Case No. 2 Case No. 3


I. YEAR OF DEDUCTION

Net income (loss) before deducting bad debts P150,000 P100,000 P (50,000)
Less: Bad debts written-off 150,000 150,000 150,000
Net income (loss) P -0 P (50,000) P(200,000)
Extent of income tax benefit P150,000 P100,000 P -0-
======= ======= ========
II. YEAR OF RECOVERY

Amount received as recovery of bad debts P150,000 P150,000 P150,000

Amount to be included in gross income in the P150,000 P100,000 P -0


year of recovery (equivalent to the extent ======= ======= =======
of income tax benefit

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