Under the cash receipts method, a sale is reported in the month in which payment is received. The election to report based on a particular method can not be changed without receiving written approval from the department. Therefore, only taxpayers who have elected to report on an accrual basis are entitled to a deduction for a bad debt. With regard to installment sales or conditional sales, a bad debt deduction is allowed if the tax liability is paid on the full sales price on the tangible personal property at the time of the sale or if a contract or other financial obligation is sold to a third party as a sale with recourse and principal payments are made by the vendor to the third party, pursuant to the default of the original payor. The principal payments may be taken as a bad debt deduction if the tax was paid by the vendor on the original sale of the tangible personal property or on the subsequent sale of the financing contract.
D gives a down payment and finances the remainder.
ABC Motor Company provides the financing. ABC sells D's note to EF Financing. The sale of the note is a sale with recourse. D, after making several payments defaults on the note. D makes several payments and then defaults.