Tax and SARS knowledge base
Can I claim a bad debt in my sole-proprietor business?
Can I claim a bad debt in my sole-proprietor business?
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Direct answer
An unpaid customer invoice is not automatically deductible as a bad debt. A sole proprietor should identify the debtor, the original income, the amount, collection history and the reason the amount is considered irrecoverable or doubtful. The treatment of a debt written off as bad can differ from an accounting provision for a debt that might not be collected. Do not let an aged-debt report decide the tax position by itself.
SARS’s business return information has separate references to bad debts and provisions for doubtful debts. Those labels help describe business records, but they do not prove a tax outcome. The facts, applicable rules and current guidance still need to be considered.
What this means in practice
Create a debtor schedule with one line per customer and invoice. Show the invoice date, goods or services supplied, amount, VAT position in the accounting records, due date, payments received, balance outstanding, and the income period. A debt is easier to review when it can be traced from the sales record to the bank statement and the collection file.
Keep the collection evidence. This can include statements, reminder emails, demand letters, payment plans, returned mail, legal correspondence, liquidation or business-rescue notices, and confirmation that the debtor has no known means to pay. A customer who is merely slow to pay is not necessarily the same as a debt that has become bad. Avoid using a generic percentage of old receivables without checking whether it has a supportable tax basis.
Distinguish a decision to write off a specific amount from an accounting provision. A book provision can be sensible financial reporting, but it is not automatically a tax deduction. Similarly, a write-off chosen to make accounts look cleaner should be supported by the actual credit risk and collection history. If the business has stopped pursuing a debtor because the owner knows the debtor personally, record that fact and obtain advice before treating it as a trade loss.
Later recoveries matter. If an amount that was written off is later paid, keep the receipt and the original debt schedule together. Do not lose the history when the debtor is removed from the accounting system. Record the recovery for review rather than assuming it can be ignored.
Step-by-step
- Produce a debtor schedule.
List each unpaid invoice, customer, amount, due date, income year and balance. Reconcile the total to the ledger.
- Gather the income evidence.
Keep invoices, delivery or service evidence, contracts, statements and proof that the relevant income was recorded.
- Document collection action.
Save reminders, demands, payment-plan correspondence, legal documents and insolvency information. Note the date and result of each step.
- Separate bad debts from doubtful debts.
Identify debts considered irrecoverable separately from provisions or estimates. Do not merge the two merely because the accounting system uses one report.
- Record later changes.
Preserve settlement offers, partial payments, reversals and recoveries. Update the schedule rather than deleting the debtor history.
- Keep filing support.
Retain the schedule, supporting documents, workpapers, submitted ITR12 and assessment for at least the SARS record-retention period.
Documents and records to keep
- Customer invoices, contracts and proof of delivery or service.
- Aged-debtor reports and a dated debtor-by-debtor schedule.
- Reminder letters, demand notices, payment arrangements and legal correspondence.
- Insolvency, liquidation, sequestration or business-rescue documents where relevant.
- Evidence of any later payment, settlement or recovery.
Important limits and exceptions
This article does not calculate a bad-debt or doubtful-debt deduction. The treatment can depend on how income was accounted for, the legal nature of the debt, the taxpayer’s trade, the evidence of irrecoverability and the relevant statutory rules. Related-party balances, loans, deposits, damages claims, foreign-currency debts and debts transferred to another person need additional analysis.
Do not classify a personal loan or advance as a trade debtor merely because it was paid from a business account. Do not backdate a write-off after a customer pays. If a collection agency, insurer or lawyer becomes involved, retain the full documents and seek advice before filing a material amount.
When to get tailored advice
Get advice for material debts, connected-party balances, debt restructurings, insolvent customers, cross-border debts or any provision based on a percentage. TaxProof can prepare a debtor evidence pack for professional review.