Tax Planning Before Year End - Write off Bad Debts and Obsolete Equipment

As part of my series on year end tax planning, here are two more ways to save on business taxes: writing off bad debts and obsolete inventory. At a corporate tax rate of 34 percent, you can save 34 cents for every $1 you expense, so it is definitely worth doing this exercise every year. If you found $2,000 in additional expenses by writing off bad debts and old equipment, you could cut $680 off your tax bill. Not bad for a few hours work.

Bad (Uncollectible) Debts
Bad (Uncollectible) debts can be written off before the end of the year and the uncollected debts can be used to lower your profits. Here is how this process works:

1. During the year, you have accounts receivable which you collect...and some receivables you are having trouble collecting.
   
2. At the end of the year, run an Accounts Receivable Aging Report to see who has not paid you for a long time.
   
3. If the customer is no longer active or has stopped paying, you may be able to cut this customer's balance from your total sales, to reduce your income.
   
4. Add up all the bad debts you want to write off. Be sure you really want to write these off. If you receive the money later, you will have to reverse the write-off and declare the payment as income. Review the list with your tax adviser.

Record the total of all bad debts on the appropriate tax form:

• Sole Proprietorship or Single Member Limited Liability Company (LLC):
  Line 27 "Other expenses" on your Schedule C
• Corporation or S Corporation
  Line 15 of Form 1120 or Line 10 of Form 1120S (for S Corporations).
  
• Partnership or multiple-member LLC
  Line 12 of Form 1065.

Obsolete/Damaged/Worthless Equipment
Obsolete, damaged, or worthless equipment can also be taken off your accounting records to increase your expenses and lower your tax liability. Here is how this process works:

• You should have a list of all equipment in your company, including office equipment and any equipment you use to make products. Go through this list and mark equipment that is: (1) obsolete (out of date), (2) worthless, damaged beyond repair, or (3) damaged but still usable.
  
• For items in categories (1) and (2) above, list the full value of the equipment for write-off; for items in category (3) above, list the reduction in value for write-down. For example, if you have a computer that you purchased for $2,000 and it's sitting in a back room because you bought a new computer, you can expense the full $2,000 purchase price because the computer is obsolete. If a piece of equipment cost $1,000 new and you feel its value is $300 less because of damage, you can list $300 as an expense, reducing the book value to $700.
  
• The total of all these write-offs and write-downs can be taken as an expense on your tax return. The assets are reduced in value.

Writing down or writing off equipment is also an exercise that needs to be conducted with the help you your tax adviser. It also assumes you set up a good record keeping system, including receivables and assets, to begin with.