Is bad debt written off tax deductible?

Published: Fri, 05/27/22

Tax Issues Regarding Bad Debts Written Off

– How to Claim for Deduction

Due to the raging Covid-19 pandemic, bad debts have become a significant issue. The possibility of bad debts is always present in business. It is natural to assume that such bad debts will be tax deductible.

However, that is not always the case.

To understand this whole concept on how to claim for tax deduction. Let’s retell it in a case study.

We’ll name the protagonist of this story The Plywood Company.

The Analysis

Assuming this takes place in the current pandemic, the Plywood Company has finally put a nail in the coffin for their debtors, Tick Constructions.

As the name suggests, the Plywood Company is a reliable supplier of plywood – especially to Tick Constructions.

Unfortunately, the rise in inflation pushed Tick

Constructions into bankruptcy by the end of the pandemic. The construction company owed them a whopping RM150,000. In response, the Plywood Company has issued outstanding payments and a reminder notice to their debtors. For good measure, they’ve issued a letter of demand to the construction company.

Despite numerous attempts, their debtor could not be located. In the year 2020, the Plywood company attempted to contact debtors by email and registered mail, but all attempts were unsuccessful.

In the end, it was to no avail. Or is it?

So, the question is what has the Plywood Company done right? More specifically, Is the bad debt written off deductible against gross business income for the YA2020 tax computation?

The Moral Of The Story

To write off a bad debt, there are 3 criteria to fulfill under the Public Ruling 4/2019 to be eligible for a tax deduction:

The debt being a trade debt.

Reasonable steps were taken to recover the debt.

Valid reasons to support that the debt has become irrecoverable.

Let's look at the first criterion: is it a trade debt?

Trade debt is money owed by a company to other companies for goods and services provided.

In this case, the Plywood company falls in this criterion.

Secondly, were there reasonable steps taken to recover the debt?

Not only have they fulfilled this requirement, but they've done it to the best of their abilities.
Given that the Plywood company has issued an outstanding payment reminder notice and letter of demand to the debtor, it is a definite yes.

The final criterion: is there a valid reason to believe that the debt has become irrecoverable?

What the Plywood Company has done right is they’ve provided proof of failed delivery attempts through registered post. Through checking the box, we can conclude that Plywood has fulfilled all the requirements.

The companies’ bad debt can be written off as tax-deductible for their gross business income in the YA2020.

To put it briefly.

Remember, if you have any trade debt that cannot be recovered and want to write it off, fulfill all the criteria under the public ruling.

Make sure you have attempted to recover and keep your receipts as evidence.

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