Write Off Debts in Kenya Under Section 15 of the Income Tax Act: A Complete Legal Guide for Businesses
- Muhoro & Gitonga Associates
- May 29, 2024
- 5 min read
Updated: Nov 18, 2025
Table of Contents
Understanding Bad Debt Write Offs Under Kenyan Tax Law
What Section 15 of the Income Tax Act Allows
Legal Requirements for Claiming a Bad Debt Deduction
Evidence Required by the Kenya Revenue Authority
When a Debt is Considered Irrecoverable
Step-by-Step Process for Writing Off Debt
Treatment of Recoveries After a Write Off
Impact on Companies Act, Data Protection Act & CBK Regulated Entities
Common Mistakes That Lead to Disallowed Claims
1. Understanding Bad Debt Write Offs Under Kenyan Tax Law
Write Off Debts in Kenya. Businesses in Kenya regularly extend credit to customers. When a customer fails to pay, the business may be able to treat the outstanding amount as a deductible expense. Section 15 of the Income Tax Act (Cap. 470) outlines the conditions under which a taxpayer can claim a deduction for bad or doubtful debts.
Bad debt deductions are not automatic. They must meet strict statutory and regulatory requirements, and the taxpayer must prove that the debt is genuinely unrecoverable.
2. What Section 15 of the Income Tax Act Allows
Section 15(2)(a) of the Act permits a deduction for bad debts proved to the satisfaction of the Commissioner of Domestic Taxes to have become irrecoverable during the year of income.
This means:
A write off is only deductible in the year in which the debt actually became irrecoverable.
KRA has full discretion to accept or reject the taxpayer’s evidence.
The taxpayer must maintain proper supporting documentation.
3. Legal Requirements for Claiming a Bad Debt Deduction
To qualify for a deduction under Section 15, the debt must:
Have been included as taxable income in previous financial periods.
Arise from normal business trading activities.
Not relate to capital items, penalties, or unlawful transactions.
Be shown to be irrecoverable despite reasonable recovery efforts.
Not be between related parties unless arm’s length principles are demonstrated.
Where the business is a company, directors must approve the write off in accordance with the Companies Act, 2015.
4. Evidence Required by the Kenya Revenue Authority
KRA typically requires documentary proof demonstrating consistent and reasonable attempts to collect the debt. The following are commonly expected:
Customer statements and invoices.
Demand letters and email correspondence.
Returned cheques, dishonoured instruments, or bank confirmations.
Reports by debt collectors, auctioneers, or advocates.
Board resolutions approving the write off.
Proof that recovery has become commercially impractical.
For financial institutions, CBK Prudential Guidelines require classification of loans and provisioning before write off.
5. When a Debt is Considered Irrecoverable
A debt may be considered irrecoverable when:
The debtor has been liquidated or declared insolvent.
The debtor cannot be traced after reasonable efforts.
Legal enforcement is impossible, or costs outweigh the recoverable value.
Security has been realized and a shortfall remains.
Repeated recovery efforts over time have been unsuccessful.
The test is objective: Would a prudent business person conclude the debt will never be recovered?
6. Step-by-Step Process for Writing Off Debt
A business should follow a structured, document driven approach:
1. Review the Account
Confirm outstanding balances, aging periods, and recovery actions to date.
2. Undertake Reasonable Recovery Efforts
These may include:
Telephone and email reminders.
Formal demand notices.
Engagement of debt collectors.
Legal notices by an advocate.
3. Assess Recoverability
Consider the debtor’s financial position, security, and history of communication.
4. Prepare Internal Documentation
Including:
Management report recommending the write off.
Board resolution approving the write off (Companies Act requirement).
Supporting correspondence and recovery records.
5. Recognize the Write Off in Accounting Records
Record the debt as irrecoverable in compliance with:
IFRS 9 (for financial instrument impairments).
The Companies Act (books of account obligations).
6. Claim the Deduction in the Tax Return
Include the write off in the corporation tax computation for that financial year. Ensure all documentation is available for audit.
7. Maintain Records for KRA Audit
Records should be retained for at least seven years, in accordance with tax and company law.
7. Treatment of Recoveries After a Write Off
If a business later recovers all or part of a debt previously written off, Section 15 requires that the recovered amount must be declared as taxable income in the year of recovery. This prevents double benefits to the taxpayer.
8. Impact on CBK Regulated, Capital Markets, and Data Protection Compliance
CBK Regulated Entities
Licensed banks, microfinance institutions, and digital credit providers must:
Comply with CBK Prudential Guidelines, including loan classification and provisioning.
Observe minimum timelines for non-performing asset recognition before write off.
File regulatory returns with CBK.
Capital Markets Participants
Entities regulated by the Capital Markets Act (e.g., listed companies, fund managers) must ensure:
Proper disclosures in financial statements.
Board approval procedures.
Audit committee oversight.
During recovery and write off processes, businesses must ensure:
Proper handling of personal data of debtors.
Lawful disclosure to third party debt collectors.
Compliance with data minimization and retention rules.
9. Common Mistakes That Lead to Disallowed Claims
KRA frequently disallows deductions where:
The debt was never recognized as income.
No evidence of recovery efforts is provided.
Write off is made long after the debt became irrecoverable.
The debt arises from related party transactions without proof of arm’s length terms.
Documentation is incomplete or missing.
The write off does not follow internal approval processes.
10. Frequently Asked Questions
1. Can any overdue debt be written off for tax purposes?
No. Only debts that are proven irrecoverable and meet Section 15 requirements qualify.
2. How long must I attempt recovery before writing off a debt?
There is no fixed period, but efforts must be reasonable, consistent, and well documented.
3. Must I sue a debtor before writing off the debt?
Not always. Litigation is only necessary if it is commercially viable. KRA accepts that legal costs may outweigh the benefits.
4. Can related party debts be written off?
Yes, but arm’s length principles and commercial justification must be demonstrated. KRA scrutinizes such transactions closely.
5. Do I need a board resolution to write off debts?
For companies, yes. The Companies Act requires documented approval for material financial decisions.
6. What happens if the debtor pays after I write off the debt?
The recovered amount must be declared as taxable income in the year it is recovered.
7. Can a provision for doubtful debts be claimed as a deduction?
Only banks may deduct legally recognized provisions under CBK Guidelines. Other taxpayers must wait until the debt becomes irrecoverable.
8. How does the Data Protection Act affect debt recovery?
Personal data must be handled lawfully, with minimal disclosure and secure storage. Sharing debtor information with third parties requires a valid legal basis.
To explore this further, see the Income Tax Act and Legal Notice 37 of 2011 on Guidelines on Allowable Bad Debts.
