It has always been difficult to recover accounts receivable due to lack of liquidity, business bankruptcy, the Covid pandemic, disappearance or death of the debtor. This implies that an analysis must be made in the credit granting policies, documentary support to determine its accounting and tax uncollectibility, so it is very important to consider the provisions of the Income Tax Law to make the deduction of accounts receivable from customers.
4. Administrative
Accounts receivable are the total of short-term credits granted and not recovered, represent the decisions to grant credit, contribute to increase the volume of sales and the generation of funds for the financing of the company’s operations.
It follows that when granting credit, companies should consider preparing a file for each of their clients, which should contain at least the following documents:
- Proof of address.
- Identification of the legal representative of the company or person requesting the credit.
- Financial statements.
- Proof of tax status.
- Ocular visit to identify the prospective client’s facilities.
3. Financial
In accordance with Financial Reporting Standard (FRS) C-3 “Accounts receivable”, the entity must disclose the main items comprising accounts receivable, such as trade and other accounts receivable, as well as the related allowance for doubtful accounts.
It also states that the policy for determining the allowance for uncollectible accounts, as well as for writing off uncollectible accounts, must be disclosed. Therefore, once the creditor determines the amount of the accounts it will consider uncollectible, it must record the loss in its financial information. The allowance for doubtful accounts should be based on expected credit losses (ECL).
2. Legal
In accordance with Articles 25 and 27, Section XV of the Income Tax Law, taxpayers may deduct losses from bad debts:
- In the month in which the corresponding statute of limitations expires, or
- Before if it is notorious the practical impossibility of collection.
In this regard, it is important that taxpayers have identified the documents that cover the uncollectible accounts, such as: sales or service contracts, invoices, promissory notes, bills of exchange, etc., and thus be able to identify the statute of limitations that applies to them, or if they can consider that it is practically impossible to collect them.
Prescription
In relation to the statute of limitations, Articles 1043 and 1047 of the Code of Commerce state that the latter is a means of acquiring property or getting rid of obligations, through the passage of a certain period of time and under the conditions established by law.
The law also provides for two types of statutes of limitations:
- Positive, which is the acquisition of property by virtue of possession.
- Negative, which is the release of obligations because they are not required to be fulfilled.
Of course, the issue that interests us concerns the negative prescription.
The following is the statute of limitations period established by law for certain receivables:
- Retail invoices, one year, counting the time of each item separately from the day on which the sale was made.
- Wholesale invoices and other civil or mercantile documents, 10 years from the date of sale.
The creditor must comply with certain requirements for its deductibility
1. Fiscal
According to the legal part of article 27, section XV in its first paragraph, it is specified:
The deductions authorized in this Title must meet the following requirements:
XV. That, in the case of losses due to uncollectible credits, these shall be considered realized in the month in which the corresponding statute of limitations period expires, or earlier if the practical impossibility of collection is notorious.”
The second paragraph of article 27, section XV, specifies:
Notorious practical impossibility of collection
“For the purposes of this article, it is considered that there is notorious practical impossibility of collection, among others, in the following cases:
When there are two or more loans with the same individual or legal entity as mentioned in the preceding paragraph, the total amount of the loans granted must be added together to determine if they do not exceed the amount referred to in the preceding paragraph.
a) In the case of credits whose principal amount at the date of maturity does not exceed thirty thousand investment units, when within one year from the date of delinquency, collection has not been achieved. In this case, they will be considered uncollectible in the month in which one year has elapsed since the delinquency.
The provisions of paragraph a) of this subsection shall be applicable in the case of loans contracted with the general public, whose principal amount at maturity is between five thousand pesos and thirty thousand investment units, provided that the taxpayer, in accordance with the general rules issued by the Tax Administration Service, reports such loans to the credit information companies that obtain authorization from the Ministry of Finance and Public Credit in accordance with the Law to Regulate Credit Information Companies.
The provisions of paragraph a) of this section will be applicable when the debtor of the loan in question is a taxpayer that carries out business activities and the creditor informs the debtor in writing that it will deduct the uncollectible loan, so that the debtor accumulates the income derived from the debt not covered under the terms of this Law. Taxpayers that apply the provisions of this paragraph, must inform no later than February 15 of each year of the bad debts that they deducted under the terms of this paragraph in the immediately preceding calendar year.
b) In the case of credits whose principal amount at maturity is greater than thirty thousand investment units, when the creditor has filed a claim before the judicial authority for payment of the credit or the arbitration procedure agreed upon for its collection has been initiated and also complies with the provisions of the final paragraph of the preceding paragraph.
c) It is proven that the debtor has been declared bankrupt or insolvent. In the first case, there must be a judgment declaring that the bankruptcy has been terminated due to insolvency payment or lack of assets.
Month of cancellation for inflation adjustment.
For the purposes of Article 44 of this Law, taxpayers that deduct bad debts must consider them written off in the last month of the first half of the year in which they are deducted.
Conclusion
Currently we have that for the authority is of utmost importance the materiality to make any deduction, that is why we start from the administrative point (internal control) and from there derives that we have a good recognition of our bad debts according to NIF, we have a commercial contract with our customers or debtors and in the end we only follow the tax process marked by law seeking to deduct bad debts for which perhaps already paid an ISR.
