The nonaccrual experience method (NAE) uses the experience of the company or service provider to judge the bad debt cases. This method is defined under the internal revenue code section of the tax laws of United States. The NAE method is a complex set of rules and regulations. Since the experience judging of the bad debt may be subjective, the NAE method allows a period of time over which the judgement is formed for a bad debt. Accounts receivables contains only the amount earned through that sale. There are safe harbor methods within the nonaccrual experience method to determine the accounts receivables which can be defined as a bad debt. A taxpayer can use this method of accounting on if he meets the criteria:
1. Working or providing services in field of health, law, engineering, architecture, accounting, or consulting and many others
2. If it applies accrual method of accounting in all amount collection for the services provided
3. If annual gross receipts (earnings) of the taxpayer for any three prior tax years are less than 5 million
For Example: If a healthcare company makes a credit sale and after some time the company starts to feel that the sale will be turned out as a bad debt based on its experience. The company can exempt the revenue from the taxable income by applying the nonaccrual experience method.
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