How to Deduct Small-Amount Bad Debts for Income Tax Purposes Without Incurring Legal Costs

For businesses and small taxpayers, dealing with overdue payments affects not only cash flow but also the tax burden. A recent article published in iProfesional by journalist Dolores Olveira discusses a key alternative established under the Income Tax regulations: deducting “insignificant amounts” of receivables without having to incur the cost of expensive debt collection lawsuits.

deducir las deudas morosas

The Problem of Delinquent Accounts and Collection Costs

Under the general rules, in order for a bad debt to be deductible for Income Tax purposes, the regulations require evidence of specific indicators of uncollectibility, such as:

  • Initiation of legal proceedings to collect the debt.
  • The debtor’s bankruptcy or filing for reorganization proceedings.
  • Clear evidence that the debtor has ceased operations or has definitively disappeared.

However, when small amounts are involved, the cost of filing a lawsuit often exceeds the value of the debt itself.

Requirements for Deducting “Insignificant-Amount” Receivables

To avoid this financial burden, the regulations allow businesses to write off these trade receivables and recognize them as tax-deductible losses, provided that all four of the following requirements are met:

  • Amount threshold: The receivable from each customer must not exceed the threshold established by ARCA, currently set at ARS 140,000 per debtor.
  • Period of delinquency: The debt must be more than 180 days overdue as of the fiscal year-end.
  • Formal notice: The debtor must have received a formal payment demand, such as a documented legal notice, a registered telegram, or another method that provides acknowledgment of receipt.
  • Cessation of business dealings: The company must have discontinued the service or stopped conducting business with the delinquent customer.

The Experts’ Perspective

As highlighted by Carlos Fernández, Tax Director at Fidem Partners, in Dolores Olveira’s article, this framework provides significant relief for small and medium-sized businesses (SMEs) and mass-market consumer businesses with large numbers of customers generating low sales volumes.

However, Fernández points out a critical issue with the current threshold:

“This amount (ARS 140,000) has remained unchanged since 2022. The tax authorities should at least adjust it for inflation so that a greater number of companies’ overdue receivables can qualify.” — Carlos Fernández, Fidem Partners

Despite the threshold’s loss of purchasing power due to inflation, the tax specialist emphasizes that this mechanism allows businesses to reduce their taxable income and, in some cases, fall into a lower tax bracket or rate tier.

Conclusion

If your company has a portfolio of small overdue receivables that have been delinquent for more than 180 days and you have discontinued the business relationship with those customers, reviewing these requirements with your accountant may allow you to deduct those losses legally without incurring unnecessary legal expenses.

Original source: iProfesional — Interview by Dolores Olveira, with contributions from Carlos Fernández, Tax Director at Fidem Partners.

En Fidem trabajamos acompañando empresas en procesos de crecimiento, planificación financiera y estructuración estratégica.

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