How to write off a debt as badĪ bad debt deduction may be claimed where you account for your assessable income on an accruals basis.
Therefore, writing off, forgiving, or waiving a debt for an amount of unpaid income will have no income tax consequences for you. If you account for your assessable income on a cash basis, you will not include an amount in your assessable income until it is received. There are different tax consequences for debt forgiveness or waiver and there may also be tax consequences for the debtor. Writing off a debt as bad is not the same as waiving or forgiving a debt. If you subsequently recover an amount that you wrote off as a bad debt and claimed as a tax deduction, the amount you recover must be included in your assessable income when you receive it. To claim a deduction for the assessable income that cannot be recovered, you need to write off the unpaid amount as a bad debt (see How to write off a debt as bad).
If you determine there is no or little likelihood that an amount included in your assessable income will be recovered from the debtor, you may be able to claim that amount as a tax deduction. If you account for your assessable income on an accruals basis, you may be required to include an amount you earn as assessable income in your tax return before you receive payment of that amount. The accounting method you use to account for your assessable income affects whether you can claim a bad debt deduction: This unrecoverable income is also known as a 'bad debt'. Deductions for unrecoverable income (bad debts)Īs a business owner, you may be able to claim a deduction for income that cannot be recovered from a customer or debtor.
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