Writing off a receivable

What it means

Writing off a receivable removes it from the books once recovery is clearly out of reach. It is an expense for accounting, but deductible only where the law recognises the reason.

A deductible write-off arises, for instance, after the debtor’s bankruptcy closes, when the debtor is dissolved without a successor, or once the time-based conditions are met.

A write-off is not a waiver. In a write-off the creditor simply stops reporting the receivable, but the legal claim survives; in a waiver the creditor gives it up and the cost is usually not deductible. In an assignment the receivable does not end either, it only changes creditor.

How it works in practice

An impairment allowance usually comes first, graded by how long the debt is overdue, reducing the tax base gradually. The write-off then closes the process and clears the sub-ledger.

Documentation decides: reminders, a claim, a court or trustee decision. Without them the office argues the debt was never pursued and disallows the expense.

Where the receivable included VAT, the creditor may in the cases the law sets out, chiefly the debtor’s bankruptcy or restructuring, make a correction of the taxable amount and reduce the VAT on the unpaid invoice. The write-off and the VAT correction are two separate steps and we track each one.

What to watch out for

Limitation alone is not a ground for a deductible write-off. It rather evidences that the creditor neglected the debt, so the period is tracked and an interrupting step taken in time.

The tax office looks hard at writing off a receivable from a related party, because within a group the creditor is presumed able to collect or not to lend. Without proof of genuine collection efforts it is usually a non-deductible cost, and sometimes a hidden benefit to the debtor.