How are bad debts treated for tax purposes?
FIEs engaged in the credit and leasing business may, upon approval of the local tax authorities, provide for doubtful debts at not more than 3% of the year-end balances of their loans (not including interbank loans) or of their accounts receivable, bills receivable and other receivables. Such provision is allowed as a deduction for income tax purpose.
Bad debts usually written off by an FIE should be reported to the local tax authorities for examination and confirmation. Accounts receivable may be written off as bad under the following circumstances:
- Bankruptcy of the debtor;
- Death of the debtor; or
- The debt has been outstanding for over two years.