Question

In calculating accounting income, a company deducted a reserve for doubtful debts of $5,139, based on a % of sales dollars.

What adjustment, if any, would be required in reconciling accounting income to income for tax purposes?

Answer 1

Under a normal reserve method, regardless of how the actual reserve is calculated, the tax deduction for bad debts is computed as follows

Particulars	Amount ($)
Closing reserve (amount of doubtful debts at end of year),
Less: Opening reserve (amount of doubtful debts at end of prior year
Add: Debts written off during the tax year
Less: Recoveries of previously written off debts
Bad debt deduction for the tax year.

The closing reserve for one year becomes the opening reserve for the following year.

So while reconciling the accounting income to income for tax purposes provision of $5139 needs to be added back and deductions as calculated above can be made.