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  • Writer's pictureRodolfo Curiel Gómez | L.C.P

Uncollectible Debts More than just a deduction.

More than a year after the beginning of the pandemic that has hit the entire population causing unemployment and economic problems, it has also caused companies to be unable to meet their expenses. A situation that has become repetitive in the production chain, causing there to be no circulation of funds and where customers are unable to pay their debts.

For companies, this means that they are faced with the possible uncollectibility of debts in their favor, which is also known as bad debts.

In many cases, due to the low amount of bad debts compared to the cost of investing in collection mechanisms, as well as the time it will take to recover them, businessmen are faced with the doubt of what can be done with these uncollectible accounts.

Articles 25 section V and 27 of the Income Tax Law establish that in order to deduct bad debts it is necessary to comply with certain requirements, which include, among others, the existence of a statute of limitations for payment, the practical impossibility of collection, the filing of a notice before the authority for deductions for bad debts, as well as giving notice to the debtor that the deduction will be made, in order for the debtor to accumulate the income derived from the debt that has not been repaid.

As can be seen, in order to achieve the deduction of the uncollectibility of a debt, it is necessary to comply with legal requirements that at some point may be greater than the benefit, as a probable solution it is worth mentioning that there is a facility in the miscellaneous tax resolution in rule where taxpayers who choose to be audited and declare this information in accordance with the rule will have fulfilled the requirement to submit the notice to the authority.

This mechanism can be a good option for companies that do not have the resources to initiate collection processes and where the cost, in relation to the benefit, does not represent a gain for the taxpayer, so that in a scenario where deductions are diminished by the decrease in cash flow, opting for deductions that the law itself allows can be a help for affected taxpayers.

We suggest reviewing with your collection department the amount of accounts that you consider that you will not be able to recover and the amount of each of these accounts in order to analyze if this option can help to avoid having to pay a tax on something that at a certain time was not collected, which negatively affects the cash flows of the business. If you consider convenient contact us and we will analyze your case in detail, to determine the benefit that we have discussed above.


Published on September 06th, 2021.

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