KRS 139.350 — Exception in the case of bad debts

(1) A retailer may deduct as a bad debt the amount found to be worthless and charged
off for income tax purposes provided the retailer is reporting and remitting the tax
on the accrual basis. The retailer may take the deduction on the return for the period
during which the bad debt is written off as uncollectable in the retailer's books and
records and is eligible to be charged off for income tax purposes. For purposes of
this section, "charged off for income tax purposes" includes the charging off of
unpaid ba lances due on accounts determined to be uncollectable, or declaring as
uncollectable the unpaid balance due on accounts if a retailer is not required to file
federal income tax returns.
(2) In determining the basis for calculating bad debt recovery, the de finition of "bad
debt" as provided in 26 U.S.C. sec. 166 shall be used, except "bad debt" shall not
include financing charges or interest, sales or use taxes charged on the purchase
price, uncollectable amounts on property that remains in the possession of the
retailer until the full purchase price is paid, expenses incurred in attempting to
collect any debt, or repossessed property.
(3) Notwithstanding KRS 131.183, any deduction taken for bad debts shall not include
interest.
(4) A retailer may obtain a re fund of tax on the amount of bad debt that exceeds the
amount of taxable sales for the period during which the bad debt is written off.
Notwithstanding KRS 131.183, the refund claim must be made within four (4) years
from the due date of the return on which the bad debt could first be claimed.
(5) If any bad debt accounts are thereafter in whole or in part collected by the retailer,
the amount collected shall be included in the return filed for the period in which the
collection is made and the amount of the tax due shall be paid with the return.
(6) If a retailer's filing responsibilities have been assumed by a certified service
provider as provided by KRS 139.795, the certified service provider may claim, on
behalf of the retailer, any bad debt allowance p rovided by this section. The certified
service provider shall credit or refund the full amount of any bad debt allowance or
refund received to the retailer.
(7) For purposes of computing a bad debt deduction or reporting a payment received on
a previously claimed bad debt, any payments made on a debt or account shall be
applied first to the price of the property or service and the sales tax on it,
proportionally, and secondly to interest, service charges, and any other charges.