Third-Party Lenders – Bad Debt Deductions
Effective October 1, 2009, a bad debt deduction may be claimed by a third-party lender or a retailer, provided that the retailer who reported the tax and the third-party lender financing the sale execute and maintain a written election designating which party is entitled to claim the deduction. There is no Treasury form to make this election. However, the election must be written, must be signed by both parties, and must clearly and unequivocally state which party is entitled to the deduction; the mere assignment of the right to the debt alone does not satisfy the written election requirement. The election must be executed before the bad debt is incurred.
The written election must be retained by the parties and made available to the Department upon request or audit. In addition to the written election, the following conditions must also be met:
- No deduction or refund was previously claimed or allowed on any portion of the account receivable.
- The account receivable has been found worthless and written off by the seller that made the sale or by the lender on or after September 30, 2009.
- The bad debt is eligible to be claimed, in accordance with the taxpayer’s accounting method, as a deduction under Section 166 of the Internal Revenue Code, 26 USC 166, or would be recognized as a bad debt if the claimant were a corporation.
A party making a refund claim must provide the written election to the Department with its refund request. A request for a refund based on bad debt incurred from the sale of motor vehicle must include a copy of the RD-108 for that vehicle.
For purposes of this deduction, “lender” includes any of the following:
- A person that holds or held an account receivable that was purchased directly from the taxpayer that reported the tax.
- Any person that holds or held an account receivable pursuant to that person's contract directly with the taxpayer that reported the tax.
- The issuer of a private label credit card that may only be used to make purchases from the vendor whose name or logo appears on the card or instrument.
The following amounts shall not be included as bad debt:
- Interest or finance charges.
- Sales or use tax charged or collected on the original sale.
- Uncollectible amounts on property that remains in possession of the seller until the full purchase price is paid, e.g., property placed on layaway.
- Expenses incurred in attempting to collect any account receivable or any portion of an account that is subsequently recovered.
- Sales tax charged on property that is subsequently repossessed.
- Any debt or account receivable that was sold, assigned, or transferred to, and remains in the possession of, a third party for collection.
- A sale where the tax was remitted to the Department after the expiration of the applicable statute of limitations.