The Fair Tax Act of 2005, Part XII
The next section covers bad debts:
`(a) Financial Intermediation Services- Any person who has experienced a bad debt (other than unpaid invoices within the meaning of subsection (b)) shall be entitled to a credit equal to the product of–
`(1) the rate imposed by section 101, and
`(2) the quotient that is–
`(A) the amount of the bad debt (as defined in section 802), divided by
`(B) the quantity that is 1 minus the rate imposed by section 101.
This refunds a business the tax remitted on a bad debt.
`(b) Unpaid Invoices- Any person electing the accrual method pursuant to section 503 that has with respect to a transaction–
`(1) invoiced the tax imposed by section 101,
`(2) remitted the invoiced tax,
`(3) actually delivered the taxable property or performed the taxable services invoiced, and
`(4) not been paid 180 days after date the invoice was due to be paid,
shall be entitled to a credit equal to the amount of tax remitted and unpaid by the purchaser.
This untaxes a business for losses on unpaid invoices.
`(c) Subsequent Payment- Any payment made with respect to a transaction subsequent to a section 205 credit being taken with respect to that transaction shall be subject to tax in the month the payment was received as if a tax inclusive sale of taxable property and services in the amount of the payment had been made.
If your customer later makes good on payment after a bad debt or unpaid invoice, you have to remit tax upon receiving the money.
`(d) Partial Payments- Partial payments shall be treated as pro rata payments of the underlying obligation and shall be allocated proportionately–
`(1) for fully taxable payments, between payment for the taxable property and service and tax, and
`(2) for partially taxable payments, among payment for the taxable property and service, tax and other payment.
This allows for tax to be spread across a payment schedule.
`(e) Related Parties- The credit provided by this section shall not be available with respect to sales made to related parties. For purposes of this section, related party means affiliated firms and family members (as defined in section 302(b)).
This prevents abuse of the bad debt and unpaid invoice credits by related parties. Affiliated firms and family members cannot apply for these credits for transactions between each other.
