Tax Treatment on Irrecoverable Debts

During this time, as we all know many companies have been significantly affected by COVID-19 and may cause the inability to continue operations and cash flow problem which resulting in difficulties of recovering trade debts. However, is writing off irrecoverable debt allowable deduction?

Based on PR No. 4/2019 of the Income Tax Act 1967, in order for a trade debt to be written off as bad and allowed as a deduction, the following conditions have to be fulfilled:

  • the debt shall be an amount that has been previously included in the gross income of the taxpayer; and
  • the debt is a debt which is irrecoverable.

In order to determine that the debt is irrecoverable, there should be sufficient evidence that reasonable efforts were made to recover the debts which including one or more of the following:

  • issuing reminder notices
  • debt restructuring scheme
  • rescheduling of debt settlement
  • negotiation or arbitration of a disputed debt
  • legal action

However, regarding the deduction of tax purpose, the following information needs to be fulfilled during a tax audit:

  • each debt has been evaluated separately
  • when and by whom this was done
  • what specific information used in arriving at that evaluation

In short, in order to claim a tax deduction on irrecoverable debts written off, the debts must be valid, reasonable steps have been taken to recover the debts and all supporting evidence are available.

Source from LHDN Malaysia ( 


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