What every taxpayer should know to apply this deduction:
Reforms to the Income Tax Law (“LISR”) in Mexico, effective from the 2022 fiscal year, introduced significant changes regarding the deduction of bad debts. According to the rationale behind these reforms, the measure responds to concerns about excessive abuse in applying the deduction. It argues that many taxpayers do not fully utilize available legal means, which negatively impacts their tax results.
Starting from the 2022 fiscal year, taxpayers must demonstrate that they have exhausted all available legal means to recover bad debts before they can deduct them. This requirement aims to curb the practice of tax deduction without genuine efforts to recover the funds, encouraging taxpayers to seek effective solutions for recovery through judicial or arbitration proceedings.
How are bad debts treated?
The tax deduction is provided for in Section 27, Section XV of the LISR, which states that losses due to bad debts are considered realized:
- in the month when the corresponding statute of limitations expires, or
- earlier, if the practical impossibility of recovery is evident.
Statute of limitations
Some cases where the statute of limitations applies:
Type | Statute of limitations | Legal frame |
Invoices | One year from the date on which the obligation to provide services, works, contributions, or deliveries was agreed upon. | 1043, fracción VI del CCom |
Wholesale invoices and other civil or commercial legal documents | 10 years from the day of sale | 1047 del CCom, y 1159 del CC |
Fees, salaries, wages, and other compensation for the provision of services | Two years from the date when the provision of services was agreed upon | 1161, fracción I del CC |
Notorious impossibility of collection:
The LISR specifies that practical impossibility of collection exists in the following cases:
Debts valued at less than thirty thousand UDIs (Investment Units):
The value of the Investment Units (UDIs) at the end of the 2023 fiscal year was 7.979020. Therefore, 30,000 UDIs approximately equate to 239,370.60 MXN. It's important to note that the UDI value is the actual value on the due date of the debt.
Based on this premise, practical impossibility of collection arises if no collection occurs within one year from the date of payment default. In such a case, the debt becomes uncollectible in the month following the one-year period since the default.
If you have two or more debts with the same natural or legal person, all debts must be added together to determine if they exceed the mentioned amount of 239,370.60 MXN.
Conditions for applying the deduction:
- The debtor is a taxpayer engaged in commercial activities.
- The creditor must inform the debtor in writing of their intention to deduct the debt.
- The uncollectible debts must be reported by February 15th of each year at the latest.
In cases involving more than thirty thousand UDIs:
In such instances, practical impossibility of collection arises when the creditor receives a final decision from the competent authority confirming exhaustion of collection efforts. This requirement for deductibility was tightened starting from the 2022 fiscal year. Previously, it was sufficient for the creditor to demand payment of the debt before a court; now, however, a final decision is required, and this decision must demonstrate exhaustion of collection efforts.
Bankruptcy:
Another scenario where practical impossibility of collection can be determined is when it is proven that the debtor has been declared insolvent.
Practical Cases:
Debts under 5,000 UDIs:
Salsa y Fiesta S.A. de C.V. has an outstanding debt of 4,500 UDIs that it has been unable to collect by February 2024. The last payment from the debtor was received in July 2023. The collections department has reported that the debtor has changed address and cannot be located; therefore, the company wishes to write off the debt as uncollectible and claim it as a tax deduction.
Since the debt does not exceed 5,000 UDIs and pertains to retail sales, it can be deducted using one of the following options:
- Statute of limitations: The limitation period is one year from the date of sale. In this case, it expires in May 2024.
- Practical impossibility of collection is acknowledged: One year has passed since the default date without successful collection efforts. Therefore, the timeline starts from July 2023 (since the last payment was received at the end of May 2023) and can be claimed from August 2024 onwards.
For debts between 5,000 and 30,000 UDIs, there are specific regulations regarding practical impossibility of collection:
On May 15, 2023, Toni Macaroni, S.A. de C.V. sold goods worth 200,000 MXN with a 30-day credit period to one of its customers. Since this was a wholesale sale, the statute of limitations is 10 years. The taxpayer wishes to write off the debt as uncollectible based on practical impossibility of collection, provided it does not exceed the equivalent of 30,000 UDIs.
Equivalent in national currency at the expiration date
| Concept | Amount |
| The value of the UDI (Investment Unit for Development) on the expiration date (June 20, 2023). | 7.766627 |
times | UDIS-Limit | 30,000 |
equals | Equivalent in national currency at the expiration date | $ 232,998.81 |
Since the amount does not exceed the limit of 30,000 UDIs, the company can deduct the uncollectible debt, as collection becomes practically impossible in the month following one year after the default, which is June 2024.
For the deduction to be permissible, the creditor must inform in writing:
- The debtor, notifying them of the deduction of the bad debt, allowing them to accumulate income from the uncollected debt.
- The Tax Administration Service (SAT), no later than February 15, 2025, regarding the deduction of uncollectible debts in the year 2024.
For debts exceeding 30,000 UDIs:
Boomer & Cringe, S.A. de C.V. has an uncollectible debt amounting to 8,000,000.00 US dollars owed by Taugnix, S.A. de C.V.
Since this is a wholesale transaction, it is crucial to determine whether the equivalent of 30,000 UDIs is exceeded:
| Concept | Amount |
| The value of the UDI (Investment Unit for Development) on the expiration date (January 11, 2023). | 7.665918 |
times | UDIS-Limit | 30,000 |
equals | Equivalent in national currency at the expiration date | $ 229,977.54 |
Since the debt exceeds the mentioned UDIs, the taxpayer can only deduct this debt due to practical impossibility of collection until:
- a final decision from the competent authority confirming exhaustion of collection efforts is obtained, or
- it is determined to be impossible to implement the decision.
Therefore, the lawsuit was filed in February 2023 with the competent courts; however, it took until March 2024 to obtain a final decision from the authority stating that collection of the debt is not possible, allowing the deduction of the debt to occur in 2024.
Then the debtor must be informed in writing to proceed with the deduction of the bad debt, allowing them to accumulate income from the doubtful debt, and the SAT must receive the notification of the deduction of the bad debt no later than February 15, 2025.
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