by Marilyn Miller
“The only man who sticks closer to you in adversity than a friend is a creditor.”
If you suffer a personal financial loss, you can get some tax relief for that loss. For example, if you buy a stock for a high price and the stock tanks and you suffer a loss, you can record that loss and it will relieve some or all of the taxes you owe.
If the same financial loss made it difficult for you to pay your debts, you may consider attempting to settle your debts for less than the balance owed. Be careful! While paying less than you owe may seem like an attractive item, you may be incurring tax liability.
Let’s say you owe $10,000 on your VISA, and you want to get rid of your debt, and of the high interest of monthly payments. You call VISA and offer them $6,000 to pay off the account. VISA accepts, and you think you have made a really smart move. Until, the following January, you receive a tax form that shows the $4,000 “written off” as taxable income to you.
If you are going to settle any debt for less than full balance, be aware of the potential tax liability. Get some tax advice. Consider applying for a loan from your bank or local credit union to refinance the debt. You may be surprised at the lower interest rate options available.
Small business owners often believe they can gain tax benefit by “writing off” bad debt when they may actually be throwing away potential income. Small businesses are likely on a “cash” accounting basis.
Cash basis accounting means that you do not count income until you receive it. So, if you provide a service or sell a product and do not get paid for it, you do not count it as income until you do get paid. Money owed to you is called a “receivable.”
As your receivables remain unpaid they are said to “age.” But unlike fine wine, your receivables do not get better with age. They cannot be used to reduce your tax liability. They cannot be used to buy equipment or hire employees.
As a small business, you keep track of your sales, right? It is equally important that you keep track of the aging of your receivables. Track them monthly. Is the pile of uncollected revenue growing? If so, there are several things you can do:
1. Take a look at your credit practices. Who owes you money? Perhaps you need to rethink who gets credit from you.
2. Implement a program to recover money owed to you. This could include an in-house effort using letters and phone calls to customers, the hiring of a collection agency or attorney to help you, or both.
3. Ignore them, and hope increasing sales make up for non-paying customers.
You know which of the options above is the worst one, right? Sadly, it is the option taken by too many companies because they are either too busy or too afraid of losing customers.
Successful small business owners take charge of their uncollected revenue and have a plan to recover it. Think of it as using your own money to grow your business. It’s easier than you think, and it’s smart.
Marilyn “Mara” Miller is committed to small businesses. For over a decade, she has been a strong advocate for her clients. She not only helps customers recover money due to them, but also works to strengthen their credit practices and procedures.
Marilyn is founder of M3 Consultants, which helps small business owners improve their cash flow through better credit practices.