What are the tax implications of a merchant cash advance?


By ,
Ask a Lender
September 20, 2017


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Key Points

Tax implications of a merchant cash advance

  • Cash advances aren't loans, so aren't reported as income.
  • Merchant cash advance fees may be tax-deductible under expenses.
  • The income used to pay merchant cash advances back is not tax deductible.

When you take out a merchant cash advance, you pledge a portion of your future sales to a cash advance provider in exchange for an upfront lump-sum payment. Merchant cash advances tend to be costlier than business loans, but are often quicker to fund and come with less stringent credit requirements.

If you are struggling to qualify for a business loan, and your business does a lot of credit- or debit-card sales, a merchant cash advance may be a viable alternative. It is important to note, however, that merchant cash advances can be a costly way to borrow money. Though the fees charged by merchant cash advance providers are technically not interest, the effective annual percentage rate (APR) on such a cash advance can be in the triple digits.

If you are considering taking out a merchant cash advance for your business, one question you may have is how doing so would affect your business’s taxes. Can merchant cash advances earn you a tax-deduction? Below are some of the ways merchant cash advances can affect your tax bill. As always, check with your tax advisor before you act.

Income

Cash advances aren’t loans, and therefore aren’t subject to taxes when the advance is made. The money received from a cash advance should not be reported as income. You will, however, have to pay taxes on your income, including income that is used to repay the cash advance company.

Tax deductions

Merchant cash advances, in and of themselves, are not tax-deductible, nor are the payments that you make to repay the advance.

Though payments made toward the principal on business loans are not tax-deductible, you can deduct the cost of interest on the loans. Merchant cash advances, however, don’t charge interest; they charge fees. These fees can be deducted from your taxes as a business expense.

Typically, the cash advance company is compensated by collecting a portion of your monthly credit card receipts. As these payments are collected, you can deduct the portion of your receipts that went toward paying the cash advance company.

Alternatives

A merchant cash advance may have only a small effect on your business’s taxes. These financial products don’t protect your income from taxes, and they don’t subject you to any additional taxes — they are, by and large, tax neutral. If you’re looking for a lending option that will result in significant tax savings, it’s best to look into alternatives. For example, if you’re looking for financing to purchase equipment for your business, an equipment loan may come with tax write-offs.

Personal vs. business expenses

It’s important to note that the IRS does not allow individuals to write off interest from personal loans or credit cards as business expenses. If the debt comes from a legitimate business expense, however, it may be tax deductible.

To know which deductions you should or shouldn’t make, it’s best to consult with an accountant who can sift through all the nuances of the tax code to ensure your taxes are filed properly.


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