Weighing Bad and Doubtful Debt – And How to Claim a Direct Write Off
Your clients’ pending debts, listed on your accounts receivable reports, directly reflect your company’s cash flow status. Although you will likely collect most of the owed funds, a portion will turn into doubtful or even bad debts. These indicators allow you to update your accounts receivable records to better show the financial wellness of your company. Once you confirm pending debts are uncollectable, you can write them off on your taxes. Here’s what you need to know about bad and doubtful debts – And the best way to claim a write off in Missouri.
Debt Status Differences
A doubtful debt has not yet been deemed completely uncollectable nor stricken from your records. Both the age of the debt and ability to negotiate payment with the debtor comes into play when deeming a debt doubtful. A bad debt, on the other hand, shows no chance of payment in part or full in the future. This debt status is usually reached after failing to obtain payment from the debtor for an extended period of time.
Doubtful Debt Allowances
You can proactively keep doubtful debts from impacting your bottom line by ushering the earmarked funds into a contra account. This type of account holds the debt expense until you can receive payment or confirm its bad debt status. If the payment comes through, you can shift the associated contra balance into your main account and update your accounts receivable records. With this method, debts that receive a bad designation do not disrupt the income statement balance at the end of that particular period.
Claiming a Direct Write Off
When you finally identify open or doubtful debts as uncollectable bad debts, you can use the information to claim a write off. You must indicate the account age in which you discharge the debt as uncollectable and remove it from the books, typically six months or more. At that point, you must cease all collection efforts for the debts you intend to write off, and then record the balance due as an expense. You can then use the bad debt totals for the year as a deduction on your taxes to reduce your gross income and decrease
your tax obligations.
If you need help identifying the status of your debts, or calculating your accounts receivable information, contact the professionals at accountRely in St. Louis, MO for assistance.