Is bad debt an asset
The bad debt requires reactions from the creditor, according to business lawyer Dr. jur. Horst Siegfried Werner, and lets the creditor think about what to do in the event of default on a fully rendered service. This is about the cases in which reminders, collections or lawsuits and foreclosures have been unsuccessful or, according to the creditors' assessment, will be unsuccessful. Is it easy to write off the defaulted receivable and write it off, or are there other options? The depreciation and value adjustment of bad debts serves to clean up the balance sheet of assets that have become worthless; Air numbers in the balance sheet do not serve the principle of balance sheet truth (only valuable receivables can be capitalized). Often, however, the motive of creditors to write off receivables and value adjustments is to assert the defaulted claim as a loss for tax purposes. As a result of tax considerations, companies as creditors often accept bad debts too early without possibly giving other considerations. The written-off claim is deleted from the creditor company's balance sheet as an asset and written off as a loss for tax purposes. It reduces income in the income statement of partnerships and corporations and leads to negative income, which in turn reduces sales and income taxes. In the case of a sales tax service, the company will be reimbursed any sales tax that has already been paid in the event of default.
In the event of bad debts, however, practically reacting with a debt waiver and a tax write-off is often unfavorable and can be detrimental in two ways. According to the knowledge of business law expert and tax expert Dr. Horst Siegfried Werner (www.finanzierung-ohne-bank.de) may be incorrect as a premature destruction of assets and burden your own balance sheet with the loss of an asset or even significantly reduce equity with negative effects on future financing ability (who hasn't heard that before that a third party was dragged to the brink of over-indebtedness or insolvency through no fault of his own due to bad debts). Correctly, instead of writing off receivables, there is an asset-preserving debt conversion through a so-called Debt Equity Swap. The conversion of the supposedly defaulted claim into equity-replacing equity capital is a contractual instrument for the creditor to preserve his own balance sheet and to avoid the deterioration of his own balance sheet. On the assets side of the balance sheet, the creditor then receives a participation asset instead of a claim. Thus, the assets side of the creditor's balance sheet is spared and the balance sheet total remains unchanged. The write-off of the receivables is always subject to a short-term perspective and, from the point of view of late payment, leads to premature abandonment of the value of the receivable. However, participation must always be viewed from a medium to long-term perspective, so that here the value realization can be projected into the future with good reasons for hope.
The creditor does not have to forego a cash tax advantage after a "bad debt loss", even if the claim is converted. Because instead of the final write-off of losses, he can convert the defaulted claim into an atypical silent participation and in this way achieve "negative income from loss allocations" from the negative income and annual deficits of the debtor himself. Thus, in the best case scenario, the creditor can get the entire tax advantage as with the write-off of the receivables and still receive his "claim" in the form of a company participation as an atypical silent partner in terms of value. Since the atypical silent participation has to be assessed from a future perspective, there is often no need to devalue the new asset. The "old debt collection" will be postponed into the future under asset preservation. The payment settlement then takes place later with termination and termination of the atypical silent participation. Should a loan claim fail, the conversion into a medium-term silent participation or participation right participation can be carried out tax-neutral. The debt-equity swap does not generate any taxes.
With the conversion of a claim into an atypical silent participation in the company, tax advantages can result from the allocation of losses: that is, the conversion of the claim as a so-called Debt-Equity-Swap leads in these cases to tax advantages with cash liquidity through tax refunds or tax repayments and at the same time to the preservation of the own business assets, so that the receivable entrepreneur does not see his own balance sheet impaired.
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