WRITE OFF BAD DEBTS!
With 31 March looming as the end of many businesses’
financial year, there’s always the prospect of paying too much tax. It doesn’t need to be this way. One of the biggest issues is the importance of writing off bad debts. It seems almost every year we have a client for whom we prepare the annual financial statements, who has a large amount of money owing to them. When we get the results for the year we find there is a big profit, which has been inflated by an excessive accounts receivable figure. Discussion reveals some of this money is never going to be collected.
Can we fix the problem?
No. The law will not permit us to write off bad debts back-dated to the previous year. The client has to pay the tax and wait until next year to get these bad debts written off.
In the end the result is the same but in the meantime our client has to pay his tax earlier than would have been necessary.Look at the debts owing to you. Are there some you have been pursuing and who won’t pay you? Have you taken every reasonable step to get paid?
If yes, you must physically write off the bad debt before balance date if you want to reduce your accounts receivable and hence your profit and tax. It depends on the system you are using as to how you go about this. If it’s a very basic system like keeping copies of the invoices you have sent out, just write on your copy the words “written off as a bad debt on…” and insert the date. Do this now. It is not something you want to overlook. You should tell us the amount you have written off as Inland Revenue likes us to record this separately.
Can you continue to try to collect a bad debt? Definitely yes. If you’re lucky enough to get some money it becomes part of your taxable income.
GET YOUR DEBTORS RIGHT AT 31ST MARCH
Clients use all sorts of systems for keeping a tally on the money owing to them. From a tax perspective, the figure at balance date needs to be accurate.
Please note: Assuming a 31 March balance date, all work done up to 31 March which is capable of being charged must be included as income. For income tax purposes holding some of your invoicing over until April does not necessarily mean you can ignore it. You don’t have to
actually send out an invoice but you do have to add the amount into your accounts receivable figure for tax purposes.
You won’t be taxed twice because once we have put in a figure for the amount owing to you, we then deduct it in the next year’s accounts. If work cannot be charged because it is not quite complete, it doesn’t get included in your accounts receivable.
Some businesses have work in progress, which is partly completed work. They must value this on the basis of the amount of material which has gone into jobs in progress and the value of the wages they have paid to do that work. Any other direct costs should also be included such as hire of equipment.Cut off - Don’t deduct money received in April, until you have finalised the total owing to you at the end of March.
Professionals, who have supplied partly completed work (not invoiced), do not need to include these services in their annual accounts unless there is a right to make progress claims.
TAX DEDUCTIONS ON FOOD & DRINK
IRD has informed us it considers the supply of all food and drink, whether in the course of entertainment or not, is tax deductible only to the extent of 50%. Thus, under this new interpretation, if you give your client a bottle of wine or a food hamper you can no longer treat this as a fully tax deductible cost. If you want a 100% deduction, think of something different such as a bunch of flowers or something else which cannot be consumed.
A lawyer’s newsletter has drawn our attention to the personal liability of committee members of body corporates registered under the Unit Titles Act 2010. If you are asked to serve on one of these committees, we suggest you require the body corporate to take out insurance to cover your risk.
BEWARE THE DEBT COLLECTOR
Inland Revenue now has the power to disclose tax debts to debt collectors. If the debt is more than 12 months old and greater than 30% of the taxpayer’s gross income, the tax department can release the information.
These disclosures are going to be very dangerous. They will damage the credit rating of those who offend. If you are in this situation, be sure to make an arrangement with the Inland Revenue to catch up and make sure you stick to it. Don’t agree to anything you are not going to be able to sustain. Obviously, if you are in tax trouble, it might be wise to talk to us first.
GET CONTROL OF DONATIONS
If you put all your donations through your company, you can keep a record of each one. When your annual accounts are completed, you can get a list of all donations for the year past
and this would tell you what you gave last year.
Set a budget for the new year. Work out which charities you want to support and how much you would like to donate. This also gives you a polite way to say No to charities that cold call you. “I’m very sorry but we have already set our budget for donations this year”.
Another way of keeping control is to save up all donation requests until one day each year, then pay them all out just the once.
Note: if the company makes a loss, you won’t be able to claim that loss to the extent it is caused by making donations, so only do this if the company always makes profits.