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Lane, JD, CFP, MBA
Lane, JD, CFP, MBA, JD, CFP, MBA, CRPS
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What is the criteria for writing off a bad debt in a business?

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What is the criteria for writing off a bad debt in a business? We do not carry a reserve.
Submitted: 1 year ago.
Category: Finance
Expert:  Lane, JD, CFP, MBA replied 1 year ago.

Hi, I can help with this.

There are essentially 2 schools of thought here:


Either write the balance off sooner rather than later, (typically as soon as you place if for collection), so as to keep your A/R “clean” and most reflective of what's truly an asset, a receivable with value

OR keep the balance on your books until your agency gives up and deems it un-collectible. The reasoning here is that it keeps your focus on the delinquent accounts so they’re not “out of sight and out of mind.”

There are some sound reasons for both approaches and what you do in your situation will probably be driven by the culture and resources at your organization, but your goals goals should be BOTH to accurately report the “true” state of your A/R AND to have a system that enables you to keep the pressure on old receivables that “still have some life” left in them.

Either way is acceptable by the IRS. You should send a 1099 to let the entity know that the IRS will see this as income to them.




Hope this help!

Lane

Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid. BUT, if you need CLARIFICATION, COME BACK here. Also, feel free to bookmark this page to come back for reference.


Expert:  Lane, JD, CFP, MBA replied 1 year ago.


As a quick follow-up, here are what some credit managers do at larger corporations:

“We write off to bad debt when the account is placed for collection. We also write off upon receipt of a bankruptcy notice. Subsequent payments are then taken into a recovery account which decreases the bad debt on the next write-off. This keeps the AR clean and more meaningful.”
– Bob Jackson, Credit Manager, Van Dyne Crotty



We leave the balances on the aging until they prove to be uncollectible, with written notice from the collection agency confirming that. As far as the DSO and inflated A/R, our philosophy is that we made the decision to extend credit availability, so if it goes south we take our lumps!

“We leave the balances on the aging until they prove to be uncollectible, with written notice from the collection agency confirming that. As far as the DSO and inflated A/R, our philosophy is that we made the decision to extend credit availability, so if it goes south we take our lumps!”
– Gregg Bostick, Corporate Credit Manager, Plastic Industries



“We clear A/R by moving to a “clearing account” or direct to bad debts, depending on specific criteria. This keeps the A/R clean and allows for a tax benefit from those determined to be uncollectible, in whole or identifiable part. We have worked with our tax department to develop the acceptable criteria.”
– Robert R Fruth, Process & Technical Improvement, Ashland Inc




“My policy at Raycom calls for accounts to be written off when they’ve been turned over for collection. If the money is collected, it goes to bad-debt recovery, and the collection fees charged to sales as an expense. If an account goes over 120 [days], it requires the permission of the general manager or corporate credit (me) to keep it open and on the books. Some reasons why it might be kept open include a payment plan or a discrepancy that’s being researched.”
–Robert Rollins, Corporate Credit and Collection Manager, Raycom Media, Inc.




“We keep the balances on A/R until our agency or attorney advises of a probable write-off situation.”
– Ken Bergeron, Senior Vice President, Credit & Account Services, Bellco Drug Corp.




“Matt: Our companies are in the same industry. We also carry the balances until deemed uncollectible. We understand the effect it causes to A/R balances and DSO. However we make a stronger push to keep the rest of the aging under control to mitigate the effect.”
– Joe Zaro, Ridgewood Corp.




Keeping on A/R: A Psychological Gain With Management?
“We’re [also] a construction material supplier and basically do it the same way as Joe. By leaving it on the A/R, you not only push to make the rest of the aging stronger; you also let management see what “gambling money” has been used up so they can become part of the solution, if necessary.”
– John Culbert, VP of Credit, Ferguson Enterprises, Inc.




“We leave balances on until the customer files, or our attorney advises that something is uncollectible. I believe that the effect of immediate write-off on DSO is minimal compared to the fact that once you write the balance off, you just do not seem to find the time to keep chasing the collection action as you would if the item was still open on the aging.”
– Bruce Diamond, Credit Controller, ALCO Industries, Inc.




Special A/R Account for Each Agency
“We also keep the debt on the A/R until the collection agency verifies it is uncollectible. However, we created a receivable account for each collection agency and transfer the debt to that account when we turn out the customer. That way, we don’t alter the botXXXXX XXXXXne of our A/R and know exactly what the agency is working on.”
–Tom Wald, Corporate Credit Manager, E&B Giftware, LLC



“I agree with the chasing aspect, as we are all familiar with out of sight, out of mind. We leave our collection accounts on the A/R until the agencies deem them uncollectible or the bankruptcy is filed."
– Eddie Keough, Credit Administrator, Hoover and Strong



A Vote For Early Write-Off: Deny Reality at Your Peril
“The balances at our company tend to be rather large ($50,000–$15,000,000), and we have very few bad debts or problem accounts. It has always been my belief that it is best to write off these balances at the earliest possible date or at least move them to a sub ledger. In a previous life, I worked for a company that was more of a retail sales organization, and I found that management did not want the bad debts so they would not permit the earlier write off. This resulted in these balances accumulating over several years, and the number became very large.

A lot of manpower was thrown at a dwindling asset and we siphoned off the manpower from attention to the current receivables which, in turn, resulted in more bad debts. In short, it became an ever increasing downward spiral, directly resulting from a reluctance to recognize a bad debt when it occurred. I guess we really thought that we could call a pile of cow dung a rose and it would smell as sweet.”
– G. Fred Marlatt, C.I.C.P., Director, Corporate Credit, Potash Corp.



Five Criteria for Write-Offs
“We write off debts that we determine are uncollectible. However, before resorting to this action all appropriate steps to collect the debt must be taken, which include exhausting both in-house and outside efforts. “Normally, a write-off will be approved only if one of the following conditions exists:

A collection agency has been unable to collect the debt.
A judgment has been entered against the debtor and has failed to result in payment.
The cost of collecting the debt exceeds the recoverable amount.
The debtor has skipped and we’re unable to locate the debtor.
The debtor filed for bankruptcy protection. “Once one of the above has occurred, the debt is written off to the bad-debt reserve account.”
–Mark Balzano, Credit & Collection Supervisor, PaperPak Products




Also see this:

http://www.rmsna.com/pdfs/EffectiveCollectionPractices01-10Booked.pdf

Customer: replied 1 year ago.

Thank you for the information . . . I understand, however I would like clarification on your 1099 comment. Is this an IRS requirement upon writing off a bad receivable?

Expert:  Lane, JD, CFP, MBA replied 1 year ago.

 

No, Paula, there is no published guidance on any REQUIREMENT to provide a 1099 for this.

 

 

Having finished a seminar on this very topic I can tell you that it would be seen as a best practice and is certainly allowed, when you have truly written off, hence, forgiven, the debt.

 

 

 

The IRS will tell you that because this entity's net wealth has increased that income taxes are owed.

 

 

 

But the only time that one is REQUIRED to send the 1099 is when you have formally FORGIVEN the debt. (and the only real documentation of that would be a letter to the entity)

 

 

There is no requirement at this time.

 

 

 

 

Lane

 

 

Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid. BUT, if you need CLARIFICATION, COME )BACK here. Also, feel free to bookmark this page to come back for reference.

 

 

 

 

Lane, JD, CFP, MBA, JD, CFP, MBA, CRPS
Category: Finance
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Expert:  Lane, JD, CFP, MBA replied 1 year ago.


Thanks Much



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…pleasure working with you!

Lane

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