Is Bad Debt Really Bad?Debt is such a rich word full of historical, metaphorical and etymological connotations that one cannot resist to say that there is no such thing as a bad debt, but only irresponsible borrowers. But even that may be too harsh to apply as a generalization when one realizes that no one wants to incur a bad debt, much less be in a situation in which one cannot pay it. There are numerous people or people who run corporations who at one point in their live run into a financial quagmire and even with their best efforts to salvage the situation and turn things around, all they get is a bad debt that hounds them like a nightmare. But is a bad debt really that bad? Most financial experts say that the key to turning a bad debt into a good situation is to confront its true nature as nothing more than a temporary financial set-back. You should not take debts personally, experts say, because they are not totally the result of bad judgments which most people tend to see as a reflection of their character. A bad debt happens because of complex financial twists and turns which are givens for a business. When one approaches a bad debt as a financial problem or puzzle to be solved, then it can easily be wiped away. Numbers after all don't change.
From an accountant's perspective, a bad debt is the portion of receivables that essentially can no longer be collected from receivables or loans. What happens in accounting practice is that they are recorded as expenses- expense that can no longer be collected and this is a good thing if you have an accountant running the financial aspect of your business. Why? Because some types of bad debts are actually considered tax deductible. The IRA or the internal revenue service qualifies the kinds of debts that can be considered tax write-offs; the debt must be a bone fide debt and that it is considered worthless within the period of the taxable year. To determine if a debt is worthless, there must be a number of considerations; one should determine whether portions or parts of the debt could be recovered in the future which includes factors such as the debtor's insolvency status, his current health conditions, current credit standing, etc. The tax code however puts a limitation of allowable deductions which should depend primarily on whether there is something to be recovered in the first place. Another factor to be considered in applying for a bad debt tax write-off is the classification of the debt itself which can either be non-business or business. A business debt of course is defined as debts incurred from the transaction of business or trade while a non business debt is simply debt that is not incured from a transaction involving trade or business. In most cases, the classification determines the deductibility; a business debt has more chance of being made tax deductible regardless if it is partially or completely worthless than a non-business debt which has to be proven as completely worthless in order to qualify. |