Did you know you can take sales tax credits for bad debts in your business? Quite often, businesses do not collect the total balance of their sales. These bad debts are kept track of, and at the end of the year, when tax season rolls around, a credit for bad debts is taken on the business’s federal return. After all, you don’t want to pay federal tax on income you never received!
Unfortunately, many accountants and business owners do not realize that tax credits can also be taken on the sales tax side of the bad debt. In most states, sales tax is due at the time of sale. For example, if a customer purchases a car with the agreement to make equal payments over five years, sales tax on the full purchase price of the vehicle is still due to the state upon purchase. That means you paid the full amount of sales tax on your sales even when you never collected the full amount from your customer. Fortunately, you may be able to get that money back.
Credit of Refund
Florida taxpayers generally can obtain either a credit or a refund for sales tax paid on accounts that ultimately became bad debts. Most businesses opt for the credit because it is more convenient to roll it into the next month of taxes due. In addition, taking the credit on the next return resolves the issue faster than applying for the refund. The Florida Department of Revenue is much more likely to allow a credit than to hand back money to taxpayers from their own pocket. The refund application process can be tedious. In addition, the Department can stall them for long periods of time, especially if they are for high dollar amounts.
However, there are situations in which a refund is the best way to recover sales tax relating to bad debts. When a business has closed, for example, and no future returns will be filed, a refund may be the only option. Similarly, if a business has ceased or reduced operations in Florida, the credit they are seeking may exceed any tax due in the foreseeable future. Finally, a change in ownership may mean that a separate and distinct party would receive the benefit of a bad debts sales tax credit for which they are not entitled. In these and other circumstances, it may be beneficial for taxpayers to consult a sales tax professional who can walk you through the application for refund process.
Timeline
If you’ve just realized you never took your credit or obtained your refund for sales tax paid on bad debts, don’t expect a windfall now going back to the beginning of your business. Like other states, Florida restricts how far a taxpayer can go back in collecting their bad debt credit or refund. Specifically, Florida restricts bad debt sales tax refunds to the following scenarios:
(a) within 12 months following the month in which the bad debt has been charged off for federal income tax purposes, or
(b) if the dealer is not required to file federal income tax returns, within 12 months following the month in which the bad debt has been charged off in accordance with generally accepted accounting principles
Taxpayers need to pay close attention to the month in which the bad debt is charged off for federal income tax purposes or in accordance with generally accepted accounting principles when no federal income tax returns are filed. Decisions made for federal tax purposes may not be beneficial for state and local tax purposes. A competent state and local tax attorney can review your bad debts and identify potential refund or credit opportunities available to you. Occasionally, it may be worthwhile to amend a federal return to maximize state and local tax savings. Regardless of the path a taxpayer ultimately chooses, one thing is certain: the earlier they begin evaluating their bad debts for sales tax purposes, the better.
Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Rule 12A-1.012 Repossessed Merchandise and Bad Debts
ADDITIONAL RESOURCES
PROTEST A FL SALES AND USE TAX AUDIT, published August 8, 2019, by Matthew Parker, Esq
IS LABOR SUBJECT TO SALES TAX IN FLORIDA, published July 15, 2019, by Jeanette Moffa, Esq.
2019 FLORIDA SALES TAX NEW LEGISLATION UPDATE, published July 12, 2019, by David Brennan, Esq.
BAD DEBTS - AN OVERLOOKED SALES TAX EXEMPTION, published August 27, 2019, by Jeanette Moffa, Esq.