FL SALES TAX GUIDE - REPOSSESSION & BAD DEBT CREDITS

If you end up having to repossess an item or you incur a bad debt, you likely are not too happy about it. The silver lining has been the potential income tax write off for the same. For Florida sales and use tax purposes, you have the ability to take a credit on your Florida sales and use tax return for the amount of the repossession and bad debt or seek a refund, if you qualify. However, the Florida Department of Revenue loves to scrutinize and disallow the credit or refund. Such action by the Florida Department of Revenue leaves you out not only the credit or refund but stuck with interest and potentially penalties as well in some cases. Talk about making a bad situation worse. This article will discuss repossession and bad debt credits and refunds along with some of the qualifications and calculations for the same in order to have a fighting chance of being able to use the credit or obtain the refund.

Repossessions

If a dealer collected and remitted sales tax to the Florida Department of Revenue on the selling price of tangible personal property, then when the property is repossessed the dealer has a couple of options with the Florida Department of Revenue. The dealer may either take a credit on a subsequent Florida sales and use tax return or obtain a refund for the portion of the tax applicable to the unpaid balance of the contract. The tangible personal property had to have been sold under a retail installment, title loan, retain title, conditional sale, or other similar contract in which the dealer retains a security interest in the property. The credit or refund is based on the ratio of the total tax to the unpaid balance of the sales price, after excluding finance and other nontaxable charges. A credit or refund must be claimed within twelve (12) months following the month in which the property was repossessed.

Repossessions are a bit of a challenge to calculate the amount of the Florida sales and use tax credit one can receive on the Florida sales and use tax return. To do so, the dealer must use Form DR-95B, Schedule of Tax Credits Claimed on Repossessed Tangible Personal Property. A copy of this form can be found at the end of the article. The DR-95B is not a form regularly submitted to the Florida Department of Revenue. Instead, the form is kept in your records to support the credit taken on the Florida sales and use tax return. During an audit, the auditor will likely ask for and need the DR-95B form to support how you calculated the credit claimed on the Florida sales and use tax return. Likewise, if you were to apply for a refund instead, the refund auditor would likely ask for a copy of the Form DR-95B to support the amount claimed as the refund.

The calculation method used on Form DR-95B to determine the amount of credit or refund is not intuitive at all. The calculation entails the amount of the purchase price less any credits or trade ins. You also have to subtract out the amount of cash down payment made (“net amount”). From here, you will list the total amount of payments due under the payment agreement. You will then take the total “net amount” and divide this by the total number of payments to get the “prorated payment amount.” You then take the amount of sales tax paid and divide this by the purchase price less the trade-in amount (not accounting for the cash down payment). This gives you the “rate factor.” To get to the “total number of payments remaining,” you must subtract late penalties paid on the account from the total amount paid on the account, then divide the result by the monthly payment due under the payment contract. You will then subtract this number from the total number of payments due to get to the “total number of payments” remaining. Finally, you will take the “prorated payment amount” and multiply by the “rate factor” then multiply by the “total number of payments remaining” to get to the credit or refund amount.

If you are confused about the calculation method after reading the above, you are in good company. The calculation method required on Form DR-95B is often miscalculated. There are many instances where the business does not even know about the requirement to use the calculation method put forth via the Form DR-95B. Even if you get the calculation correct, you will still have to have other documentation to support why you are taking the credit or are seeking a refund. If the documentation does not support the valid legal reason for the credit or refund, then you will likely be unable to obtain the refund or credit.

Bad Debts

In instances where a dealer collected and paid sales tax to the Florida Department of Revenue but later determined the account is a bad debt, then the dealer may be able to take a credit or obtain a refund. The credit or refund will be based upon the unpaid balance due on the worthless account. It must be taken within twelve (12) months following the month in which the bad debt has been charged off for federal income tax purposes. If the dealer is not required to file federal income tax returns, then the credit must be taken or the refund applied for within twelve (12) months following the month in which the bad debt has been charged off in accordance with generally accepted accounting principles.

If the amount of an account found to be worthless and charged off is comprised in part of nontaxable receipts (such as interest, insurance, or other similar charges) and in part of taxable receipts upon which tax has been paid, a bad debt deduction may be claimed only with respect to the unpaid amount upon which tax has been paid. In determining the amount, all payments and credits to the account shall be applied in proportion against the various parts comprising the amount the purchaser contracted to pay. In other words, the proportional application of the payments to the taxable and nontaxable components is used. This calculation method is very different from the calculation method used for repossessions.

If the tax rate in effect at the time of the sale is different from the tax rate in effect at the time the bad debt is charged off, the dealer must use the tax rate in effect when the sale was made in order to properly calculate the amount of the credit or refund. If the dealer maintains a reserve for bad debts, only actual charges against the reserve account representing uncollectible debts or accounts may be deducted for sales tax bad debt purposes. Contributions to the reserve account are not deductible as a sales tax bad debt. If a dealer recovers in whole, or in part, amounts previously claimed as bad debt credits or refunds, the amount so collected shall be included in the first sales and use tax return filed after such collection occurred.

Conclusion

In conclusion, it is critical for businesses to know the different calculation methods required for repossessions and bad debts. If a business does not know what to do or how to do it, then the Florida Department of Revenue will certainly help the business by disallowing the credits taken or refunds sought. Moreover, qualifying for the repossession or bad debt credit or refund is also a function of ensuring one maintains sufficient back up documentation. Even with the correct calculations, not having the proper documentation can squash any claim you might have.

About the author: David Brennan is partner with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues, including that of motor vehicles and boats. You can read his BIO HERE.

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. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.

AUTHORITY

Section 212.17, F.S., Tax credits or refunds

Rule 12A-1.012, F.A.C., Repossessed Merchandise and Bad Debts

Form DR-95B, Schedule of Tax Credits Claimed on Repossessed Tangible Personal Property

ADDITIONAL RESOURCES

FLORIDA SALES TAX AUDITS PROCESS AND TRAPS, published March 4, 2023, by David J. Brennan, Jr., Esq.

PHONE CALL FROM FLORIDA DEPARTMENT OF REVENUE: SALES TAX, published October 15, 2022, by Jeanette Moffa, Esq.

BAD DEBTS - FLORIDA SALES TAX EXEMPTION, published August 23, 2019, by Jeanette Moffa, Esq.

FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.

FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.