Tax Possibilities – Bad Debt Write-off
As many businesses are struggling to collect outstanding amounts, it may be worthwhile to identify any receivables which have previously been included in income that can be written off as bad debts. This allows for a deductible expense to reduce taxes. A number of factors should be considered, including:
- the history and age of the debt;
- the financial position of the debtor, its revenues and expenses, whether it is earning income or incurring losses, its cash flow and its assets, liabilities and liquidity. These should be compared to prior years as well;
- changes in total sales as compared with prior years;
- the general business conditions in the country, the community of the debtor, and in the debtor’s line of business; and
- the past experience of the taxpayer with writing off bad debts.
While the expense as a result of the bad debt will provide relief on the filing of the tax return associated with that period, GST/HST can generally be recovered sooner on the filing of the return for the period. So, for a monthly remitter with a December year-end, a bad debt with GST/HST written off in April would yield a GST/HST refund when the April GST/HST return is filed. The expense would be claimed in the following year when the tax return for the December 31 year-end is filed.
While a bad debt is one that will not be collected in the future, a business may claim a reserve for doubtful account which is a reasonable amount in respect of doubtful accounts. The reserve for doubtful debts claimed in one year must be included in income in the next subject to a new reserve being taken in that following year. The GST/HST on a doubtful account is not recoverable – the debt must be entirely bad to recover GST/HST.
Business Possibility – 1414All
If planning on writing off amounts, consider asking the client to pay-it-forward using the 1414All model. It puts your business, the client, and the community in a more positive place. It changes the tone of the interaction from one of negativity and loss, to one of building and hope.
The same concept could be used if you are providing goods or services for free to help clients out during these challenging times.
How would it work?
Let’s say that $100 is owed but the client can only pay $20 and you were going to writeoff $80 anyways. In exchange for the $80 write-off, ask the client to simply:
- Pay-it-forward by making their community a little better in whatever way they can, when they can;
- Post about it on social media (Linked-in, Twitter, facebook etc.) using #1414All with something like: “Thanks for consultation work ABC Co. (mentioning your company name is optional), I paid it forward by delivering groceries to a neighbour! #1414All”
The bottom line is that an intentional ask is made for the good deed to be paid forward, and that accountability is added by requesting that they post about it (or if they are social media shy, that they send you an email). Some clients may be unsure what they can do to pay-it-forward. In those cases, send them to 1414All.org for ideas.
Positive, unique, and authentic goodwill actions in times of emotional and financial distress are highly memorable. By specifically asking clients to do something good, you’ve: involved them in a positive action; given them the opportunity to feel like they’ve paid off a debt when they may not have thought it possible; demonstrated your commitment to the community; and started a chain of goodwill.
ACTION ITEM: Review outstanding accounts for potential write-offs. Consider implementing a 1414All pay-it-forward policy.