Seattle Rule5-064
Credit losses, bad debts, recoveries.
(1) Introduction. This rule explains the Seattle business license tax as itapplies to credit losses, bad debts, and recovery of previously
reportedlosses. It also addresses bad debt deductions available to cellular telephonebusinesses.
(2) Bad debts defined. Bad debts mean income or revenue amounts written offthe taxpayers books of record when it is decided that the income
previouslyreported by a taxpayer will not be received.
(3) Business License Tax.
(a) Bad debt deductions. In computing the business license tax, taxpayerswhose regular books of accounts are kept on an accrual basis may deduct
theamount of business credit losses actually sustained, providing that suchdeduction will be allowed only with respect to activities upon which a tax hasbeen previously paid and providing that the amount has not been otherwisededucted and that credits
have not been previously issued (see 5.45.100(L)).
(b) Bad debt deductions must be taken by the taxpayer during the taxreporting period during which such bad debts were actually charged off on
thetaxpayer's books of account and would be eligible for a bad debt deduction forfederal income tax purposes. Such deduction must be adjusted to amountsattributable to:
(i) Expenses incurred in attempting to collect debt; and
(ii) The value of repossessed property taken in payment of the debt; and
(iii) Amounts due on property that remains in the possession of the selleruntil the full purchase price is paid.
(c) In cases where the amount of bad debts legitimately charged off in aparticular reporting period exceeds the gross income for such period,
theexcess of the amount of the bad debts charged off during such period may bededucted from the gross income of the subsequent tax reporting period.
(d) A dishonored (bad) check which proves to be uncollectible is a baddebt, to the extent it was taken as payment for goods or services on
whichbusiness tax was previously reported and paid.
(e) Extracting or manufacturing. Bad debt deductions under the extractingor manufacturing classifications will be allowed only when the value
ofproducts is computed on the basis of gross proceeds of sales.
(4) Determining credit losses specific charge off method. The amount ofcredit losses actually sustained must be determined in accordance with
thespecific charge-off method which is the amount actually charged off within thetax reporting period with respect to debts determined to be worthless.
(a) Worthlessness of a debt is usually evidenced when all the surroundingand attending circumstances indicate that legal action to enforce payment
wouldresult in an uncollectible judgment.
(b) A "charge-off" of a debt, either wholly or in part, must beevidenced by entry in the taxpayer's books of account.
(c) When the taxpayer actually determines and charges off bad debts on atax reporting period basis, the amount so charged off each period shall
beconsidered prima facie as a proper deduction for such period.
(d) When bad debt losses are ascertained annually upon specific charge-offmethod, the deduction must be taken against the gross amount reported for
theperiod in which the bad debts were actually charged off.
(e) Credits, refunds, and deductions for bad debts are based on federalstandards for worthlessness under section 166 of the Internal Revenue Code.
Iffederal income tax return is not required to be filed, the taxpayer is eligiblefor a bad debt credit, refund, or deduction on the Seattle business license tax return if the taxpayer would otherwise beeligible for the federal bad debt deduction.
(5) Recoveries. Amounts subsequently received on account of a bad debt oron account of a part of such debt previously charged off and allowed as
adeduction for business license taxpurposes, must be included in gross proceeds of sales (including value ofproducts when measured by gross proceeds of sales) or gross income of thebusiness reported for the taxable period in which received. This
is true eventhough the recoveries during such period exceed the amount of the bad debtcharge-off.
(6) Application of payments. Payments received before or after a bad debtcredit, refund, or deduction is claimed should be applied first
againstinterest and then against other amounts.
(7) Utility tax. Only bad debts written off for cellular phone revenue maybe deducted as bad debts under the utility tax. There are no other
provisionsfor bad debt deductions under the utility tax.
(8) Statute of limitations for claiming bad debts. No credit, refund, ordeduction, as applicable, may be claimed for debt that became eligible for
abad debt deduction for federal income tax purposes more than four years beforethe beginning of the calendar year in which the credit, refund, or deduction isclaimed.
(9) Examples. The following examples identify a number of facts and thenstate a conclusion. These examples should be used only as a general guide.
Thetax results of other situations must be determined after a review of all of thefacts and circumstances.
In all cases, an eight percent combined state and local sales tax rate isassumed. Figures are rounded to the nearest dollar. Payments are applied
firstagainst interest and then ratably against the taxable price, sales tax, andother charges except when the special rules for subsequent recoveries on a baddebt apply (see subsections (2) and (3) of this section). It is assumed thatthe income from all
retail sales described has been properly reported under theretailing B&O tax classification and that all interest or service feesdescribed have been accrued and reported under the service and other activitiesB&O tax classification.
(a) Seller makes a retail sale of goods with a selling price of $500. Nopayment is received by Seller at the time of sale. One and a half years
later,no payment has been received by Seller, and the balance with interest is $527.Seller is entitled to claim a bad debt deduction on the federal income taxreturn. Seller is entitled to claim a bad debt deduction of $500 under theretailing tax
classification, and a bad debt deduction of $27 under the serviceand other activities B&O tax classification.
(b) The facts are the same as in (a) of this subsection, except that sixmonths after the write off and deduction are claimed, a $50 payment is
receivedon the debt. Recoveries received on a retail sale after a write off anddeduction have already been claimed must be applied first to the interest andthen to the taxable price in order to determine the amount of tax that must berepaid. Therefore,
Seller must report $27 in interest income on the currentexcise tax return and $23 under the retailing classification.
(c) Seller sells a car at retail for $1000 and charges the buyer anadditional $50 for license and registration fees. Seller accepts trade-inproperty
with a value of $500 in which the buyer has $300 of equity. Sellerreceives and passes on the $50 for license and registration fees. Eight monthslater, Seller has not received any payment on balance due. Seller is entitledto claim a bad debt deduction on
the federal income tax return. The equity inthe trade-in is equivalent to a payment received at the time of purchase,reducing the balance remaining on the initial sale to $700, or $1000 - $300.Seller is entitled to claim a deduction of $700 under the
retailing taxclassification, exclusive of any deduction for accrued interest.
DIRECTOR'S CERTIFICATION
I, Glen M. Lee, Finance Director of the City ofSeattle, do hereby certify
under penalty of perjury of law, that the within andforegoing is a true and
correct copy as adopted by the City of Seattle,Department of Finance and
Administrative Services.
DATED this ______ day of July 2016.
CITY OF SEATTLE,
a Washington municipality
By: ____________________________________
Glen M. Lee,Finance Director
Department ofFinance and Administrative
Services
Effectivedate: July 14, 2016