An organization in the business of making profit and trade continuity will issue invoices, render a service, and carry out a particular function which is expected to have a direct impact on the inflow of the business. While carrying out the day-to-day operation of the business and in some unexpected situations, the proceeds from the services rendered or goods sold are either never paid or remain unpaid over a long period. 

Bad or doubtful debt is considered to be a financial and operational risk in an organization. The general understanding of the tax treatment on bad and doubtful debts with the likelihood of getting worse over time is its allowability as tax deductions for computing assessable profit, this approach appears to agree with the generally accepted accounting practices for trade receivables classed as bad or doubtful debt. IFRS 9; “Financial Instruments” requires an entity to objectively assess their trade receivables for impairment at the financial year-end, while charging any loss thereon to the income statement for the period. The drafters of the standard intended to provide a prudent guideline to entities reporting revenue for a particular period and also ensure that these entities are not subjected to taxes on unearned revenue.


The relevant income tax laws in Nigeria; Company Income Tax Act (CITA), Personal Income Tax Act (PITA), and Petroleum Profit Tax Act (PPTA) were all clear on the admissible of bad and doubtful debts as allowable deductions for income tax purposes.

Section 24 of the Company Income Tax Act states that corporate taxpayers are allowed to take a deduction for bad debts incurred in the course of a trade or business proven to have become bad during the period for which the profits are being ascertained and doubtful debt to the extent that they are respectively estimated to the satisfaction of the board have become bad during the period notwithstanding that such bad or doubtful debt were due or payable before commencement of the said period

The above section of the law has validated taxpayer’s motive of deducting bad and doubtful debt from the income or profit in Nigeria to be taxed in a given year. However since the last sentence of the S24 of CITA has given the Board the power to decide on the admissible of bad and doubtful debt “satisfaction of the Board”, FIRS in many instances disallowed the bad and doubtful debt as an allowable deduction in a given period.

Generally, the most common approach to recognize and admit bad or doubtful debt for tax purposes is what we can agree to be synonyms to the simplified approach of IFRS 9; “Financial Instrument” which narrow the stages/conditions to admit that debt or the doubtful debt has gone bad and most likely irrecoverable;

  1. Appointment of a recovery agent
  2. Legal action against the defaulters
  3. Proof that the debtor might not be able to pay back (Insolvency/Bankrupt)


In the pursuit of the FIRS to exercise their discretionary powers on bad and doubtful debt and enforce compliance on taxpayers, it is also worthy to consider the equity principle of taxation and enabling environment for business to thrive.

In lieu of that, we advise that businesses and organizations should adhere to the aforementioned three stages to recover the debt owed to the company to avoid any lengthy or prolonged reconciliation with the FIRS.

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