Overview
States follow an accrual accounting method for sales tax reporting, which creates a timing mismatch between when tax is owed and when payment is actually received. Under this system, businesses must report and remit sales tax when they invoice customers, not when they receive payment. This means you're paying sales tax on transactions that may ultimately become uncollectible.
Fortunately, most states recognize this inequity and allow you to claim a bad debt credit on your sales tax return to recover the tax you previously remitted on that uncollectible invoice. While the concept of bad debt credits is widely accepted, the specific requirements vary significantly by state. Common requirements include:
- Collection exhaustion — Proof that collection efforts have been exhausted.
- Write-off documentation — Documentation showing the debt has been written off for accounting purposes.
- State compliance — Evidence that the debt meets the state's definition of "bad debt".
- Timing requirements — Proper timing of the credit claim (some states have specific deadlines).
By understanding how bad debit credits work and staying compliant with state-specific requirements, businesses can recover the amounts remitted on sales tax they never received.
Approaches for managing bad debt credits in Anrok
To effectively manage bad debt sales tax credits, businesses should maintain detailed records of all uncollectible accounts, including documentation of collection efforts and the timing of write-offs. It's also important to understand your state's specific requirements and deadlines for claiming these credits.
Some billing systems, such as Stripe, allow users to mark invoices as bad debt/not collectible, which automatically creates a credit in Anrok. If your billing system does not have this feature, you have two options to reflect a bad debt credit on your next return:
- Void the invoice in your billing system — This option is recommended if you need to be credited the entire tax amount. If you have been partially reimbursed for some of your bad debt (e.g., through credit insurance), this option is not recommended.
- Manually create a credit in Anrok — Here is our Help Center article with instructions on manually creating a transaction: Manually add a transaction. When creating this transaction, use the negative sign (-) for Total sales to indicate that it is a credit.
Once the bad debt credit is reflected in Anrok, it will be added to your next tax return in the relevant jurisdictions. See Approach refunds and credits on returns.