California to End Bad Debt Deductions for Lenders and Retailer Affiliates in 2025

Beginning January 1, 2025, lenders and retailer affiliates in California will no longer be able to claim sales and use tax bad debt deductions or file refund claims for accounts written off as worthless on or after that date. This change, enacted under Senate Bill 167, applies to accounts written off for income tax purposes starting in 2025.

However, there’s a window for action: Lenders may still claim deductions or refunds for accounts deemed worthless prior to January 1, 2025 (most commonly on their Q4 2024 returns). Claims must be made within three years of the account being written off. Lenders must also report any recoveries of previously claimed bad debts, either when received or by estimating future recoveries using historical data. Those opting to estimate must ensure accuracy, as over- or under-reported recoveries are subject to CDTFA assessment.

Lenders planning to close their CDTFA accounts should first ensure all recoveries are reported or estimated. Any collections after account closure must still be timely reported and paid. (California Department of Tax and Fee Administration, Special Notice L-983, Reporting Tax Recoveries on Bad Debt Losses for Lenders and Retailer Affiliates Beginning January 1, 2025).