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Revenue Administrative Bulletin 1989-61Approved: October 3, 1989
SALES AND USE TAXES - REVISED BAD DEBT GUIDELINES
(Replaces Sales and Use Tax Bulletin 1983-4)
RAB-89-61. Effective January 1, 1984, 1982 PA 23 amended the Sales Tax Act, MCL 205.51 et seq., to allow a deduction for bad debts. This Bulletin explains the bad debt deduction a retailer may claim relating to previously reported taxable retail sales. [MCL 205.54i(l)]
Effective May 24, 1985, a taxpayer may deduct the amount of bad debts relating to prepaid sales tax on gasoline. [MCL 205.56a(3)]
Bad Debt Defined
"Bad debt" means that portion of a debt or account receivable relating to a sale at retail, or to prepaid sales tax on gasoline, not otherwise deductible or excludable, that has become worthless or uncollectible between the last sales tax reporting period and the current sales tax reporting period. This bad debt must be eligible to be claimed, in accordance with the taxpayer's accounting method, as a deduction under Section 166 of the Internal Revenue Code.
Amounts Not Included as Bad Debt
The bad debt deduction for sales tax purposes shall not include any amount represented by the following:
Substantiating a Bad Debt Deduction
The taxpayer claiming a bad debt deduction must substantiate the validity of such a deduction by maintaining a record of all of the following:
If the above documentation is not available, then the maximum deduction allowed shall equal the amount of the bad debt times the percentage obtained by dividing the retailer's taxable sales in the preceding calendar year by total sales in the preceding calendar year.
Bad Debt Reserve Account
If the retailer maintains a reserve for bad debts, only actual charges against the reserve representing uncollectible debts or accounts may be deducted for bad debt purposes. Contributions to the reserve account are not deductible as a sales tax bad debt.
Recouping a Bad Debt After Deduction
If a retailer takes a bad debt deduction and later collects all or part of the account, then the amount collected must be reported as a taxable sale in the reporting period it was collected.
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