It is very often the case that unpaid debts owed to a business can have a significant impact on cash flow and the ongoing profitability of a business. In a taxation context the characterisation of a particular debt as either “doubtful” or “bad” is key as to whether or not the writing off of that debt would be deductible.
Generally, the characterisation of a debt would be premised on the following principles:
- Doubtful debt – is a receivable amount that might eventuate to be a bad debt in future. Doubtful debt often represents a mere accounting provision and is not deductible for tax purposes for the current financial year but may evolve into a bad debt the following year.
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