New Bad Debt Deduction Procedures for Service-Based CompaniesOctober 21, 2011
Writing Off Bad Debts Just Got Easier and Better!!
Effective for tax years ending after September 27, 2011, the IRS has enacted new rules to greatly accelerate the bad debt deduction for service-based taxpayers on the accrual method of accounting. Historically, taxpayers were required to keep track of mountains of information surrounding their uncollectable revenue in order to claim a deduction for amounts which they knew were uncollectible, but yet had written off. For many taxpayers this was a major burden, so they were left with deducting bad debts when all attempts to collect had ceased and they physically wrote-off the debt from their books. Usually this was in a future year. The new Revenue Procedure allows 95% of the current year’s addition to the bad debt allowance for services rendered that year as a tax deduction (the “NAE Book Safe Harbor”). Taxpayers using other, more complex, NAE safe harbors can continue to use those methods or change their method of accounting to the new NAE Book Safe Harbor.
Here are four general requirements (all of which must be met) for the NAE Book Safe Harbor method:
- Your tax returns must be on the accrual method of accounting,
- You must be in a service-based business: with less than $5 million in revenue, or in certain fields regardless of revenue (eg. health, law, engineering, architecture, accounting, actuarial science, or consulting)
- You (or your parent in which it is consolidated) must have audited financial statements that are either used for credit purposes or reporting to shareholders (there is one exception)
- The receivables to which the NAE Book Safe Harbor method are to be applied must be generated from the performance of services by the taxpayer (not acquired) and the taxpayer cannot charge interest or penalties for failure to timely pay such receivables.
This is great news for many of our clients. We are here to help you analyze the impact of this accounting method change, so do not hesitate to contact your Tax Team at KLR and get the full details of what you need to do. We look forward to discussing how this will help you!!