The IRS has provided a new accounting method for computing bad debts. A new revenue procedure provides a safe-harbor method of accounting for taxpayers using the nonaccrual-experience (NAE) method of accounting for uncollectible receivables.

Eligible businesses must use an accrual method of accounting and either:

Provide services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting, or

• Have average annual gross receipts less than $5 million.

In general, under the NAE book safe-harbor method, businesses may compute their bad debt expense by reference to 95 percent of the year-end allowance for doubtful accounts on the company’s financial statement. The new guidance also provides procedures for obtaining automatic consent to change to the NAE book safe-harbor method. The new procedures apply to tax years beginning on or after Sept. 28, 2011.

Read more in Revenue Procedure 2011-46.