6 FAQs On Writing Off Bad Debt For Malaysian SMEs

After nearly a decade of helping businesses in Malaysia with debt recovery, there are times when a debt is simply unrecoverable, and the most pragmatic solution is to live and learn.

That said, in such circumstances, all is not lost as the creditor can always opt to write off the bad debt which entitles them to a tax deduction. By doing this, losses can be minimised and some money put back into business.

Below, we address the six main questions on the topic.

Q1: Does Rule & Co always recommend suing if recovery fails?

Not always. My priority is to help clients avoid throwing good money after bad. Litigation can be expensive, and sometimes the smarter option is to cut losses and capture value through bad debt tax relief in Malaysia.

Q2: What is LHDN's position on bad debt tax relief?

Under Section 34(2) of the Income Tax Act 1967, debts that are proven to be irrecoverable can be written off as Bad Debts. This allows you to deduct them from your taxable income.

Q3: How much can I save by writing off bad debt?

Depending on your tax bracket, this relief can translate into 15–30% in corporate or personal income tax savings on those unpaid invoices. While it’s not a full recovery, it’s still money back in your pocket.

Q4: What are the requirements to have bad debt written off?

You must show that you’ve taken reasonable steps to recover the debt. Examples include:

• Issuing a Notice of Demand through a debt recovery lawyer

• Evidence that the debtor is bankrupt, liquidated, untraceable, or that the debt is time-barred

• Proof that litigation costs would outweigh recovery benefits

  
  

Q5: What kind of evidence will auditors accept?

Most auditors in Malaysia will accept a legal Notice of Demand as sufficient proof of recovery attempts. Some may also require a short explanation letter from your lawyer.

Q6: Why should I consult a debt recovery lawyer before claiming tax relief?

My role isn’t just to chase debts. It’s to help you make strategic financial decisions:

• Sometimes that means fighting hard in court.

• Other times, it means recognising when to stop, write off the debt, and recover value through tax savings.

Let Rule & Co assist with your bad debt write-offs

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If you’ve sent reminders and been ignored or simply don’t want the hassle of chasing payments, Rule & Co is a debt recovery law firm that focuses on helping creditors recover debts via legal strategies that minimise upfront cost, maximise recovery, and protect your reputation.