What is the non-credible experience method?
The Nonaccrual Experience Method (NAE) is an accounting procedure authorized by the Internal Revenue Code (IRC) for the treatment of bad debts. This method can only be applied to bad debts for services rendered in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law or the arts. show. The business in question must also have average annual gross revenue for the previous three taxation years of less than $ 5 million.
Understanding the nonaccrual experience (NAE) method
A business contracts a bad debt when it cannot recover the money it is owed. Bad debts that cannot be claimed on the business income tax return using the non-credible experience method can be claimed using the more common direct debit method. With NAE, the company can estimate the level of debt that will end up being a bad debt based on its own past experiences with customers and suppliers.
A non -crual experience based accounting method, as described in SEC Rule 448 (d) (5), allows certain service providers, with the exception of accrual accounting, to not collect the portion of the income that they have determined will not be collected, based on their own experience and through the use of the forms authorized under this section and the regulations. These service providers must belong to the following categories: in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law or the performing arts. According to the rule, a taxpayer is eligible to use an NAE accounting method if the taxpayer uses an accrual method of accounting for amounts received for the provision of services by the taxpayer, is in one of the sectors of services listed above, and earned less than $ 5 million in gross revenue in any of the past three taxation years.
There are several ways to use NAE. For example, a taxpayer may seek the consent of the IRS to change a formula that clearly reflects the experience of the taxpayer. This article focuses on the nuances surrounding the adoption or modification of NAE refuge methods. The safe harbor refers to an accounting method which avoids legal or tax regulations or which allows a simpler method for determining a tax consequence than the methods described by the precise language of the tax code. In September 2020, the IRS released a revised rule that allowed taxpayers to account for income using the NAE method to calculate bad debt by applying a factor of 95% to their allowance for doubtful accounts, as determined in the applicable financial statements. of the taxpayer.