BIR Reg. on Deductibility of Bad Debts

Bad debts: Debts that are wholly or partially worthless or uncollectible, arising from money lent or income from goods/services.
Securities: Includes shares, bonds, debentures, notes, certificates, or other corporate/government issued indebtedness.
Actually ascertained to be worthless: Determined based on sound business judgment, facts, circumstances; mere doubt or difficulty collecting is insufficient.
Actually charged off from books: Debt must be written off and cancelled in accounting records by year-end; estimated uncollectibles do not qualify.

Indebtedness must be valid, legally demandable.
Must relate to taxpayer's trade, business, or profession.
Cannot be between related parties as defined by law.
Must be charged off the books by the end of taxable year.
Debt must be actually ascertained worthless and uncollectible as of year-end.
Commissioner considers evidence including collateral, debtor's financial condition, independent collection efforts.
Banks follow special rule: worthlessness ascertained by BSP Monetary Board.
Receivables from insolvent insurance or surety companies may be deducted only if officially declared closed.

Recoveries of previously deducted bad debts must be included as gross income to the extent of prior tax benefit.
If no tax benefit was realized originally (e.g., business loss), subsequent recovery is considered return of capital, not income.

Worthless securities held as capital assets, charged off within the taxable year, treated as loss on sale/exchange dated at year-end.
Taxpayer must produce clear and convincing evidence of worthlessness.
Banks and trust companies with deposit-taking operations excluded from this rule.

Revenue regulations or issuances inconsistent with these rules are repealed, amended, or modified accordingly.

Regulations effective 15 days after publication in a newspaper of general circulation.