Tax advantages of merchant cash advances

Thu | January 2020

It’s time to start thinking about how to save money on your taxes. And the simplest way to do that is to take advantage of every deduction you can. If you accepted a Merchant Cash Advance this year, you should talk to your financial professional about the tax benefits associated with MCA funding.

What is a Merchant Cash Advance?

As noted above, MCAs aren’t loans; they are an advance against a business’s expected future income. An MCA enables smaller businesses to get a lump sum of cash now and pay it back by an automated withdrawal of a set percentage of your (usually daily, but terms can vary) business transactions. Typically, MCAs are a great option for businesses such as shops and restaurants that get most of their income from daily credit card and debit card transactions. But other small businesses can also qualify for a Merchant Cash Advance. And a business owner doesn’t have to have a great credit history to be approved for an MCA, or collateral to secure the funding.

Tax deductions and merchant cash advances

It’s easy to find information on the tax benefits of business loans, but as small business owners increasingly turn to alternative forms of funding, its important to know what deductions are associated with these forms of funding, particularly offers like Merchant Cash Advances which are significantly different from loans. See below for details.

Merchant cash advances (MCAs) are not reported as income

MCAs are not reported as income because an MCA is an advance against a business’s expected future income. It is a way for businesses to get a lump sum of cash now and pay it back by an automated withdrawal of a set percentage of your (usually daily, but terms can vary) business transactions.

Given the way an MCA works, at the time when the funds are advanced, they are not subject to tax, as it is an advance on your income not a loan. But the income that you then make and use to repay the advance is, of course, taxable. It’s important to make sure you do not claim an MCA as income or a loan.

You may be able to deduct MCA-associated fees

Since merchant cash advances are not loans, and do not charge interest, you may feel that you are losing an important tax advantage.

But you may be able to deduct the fees associated with merchant cash advances as a business expense. As you pay back the advance, the portion of the payback amount representing the fees could be deductible. The amount you can deduct (assuming you are entitled to claim a deduction) varies according to the terms of the advance. Ask your tax professional or accountant how to calculate and deduct the MCA fees from your MCA payments.

Also, it is important to remember that you can’t always deduct interest on a business loan. The tax code restricts this deductible to formal loans, not money you borrow from family or friends unless you follow strict guidelines such as but not limited to creating a formal agreement and payoff plan. You also must spend the loan – if the money is sitting in your business bank account it is not considered a business expense, it’s an investment and the interest isn’t tax deductible. It’s important to pay very close attention to the IRS rules so that you can properly deduct the interest on a small business loan and avoid unpleasant surprises.

Consult a trusted financial advisor

The information in this article is a general overview and is not intended to be financial advice specific to your needs. Your tax situation and your business financial status are unique to you and your business. Discuss MCAs and their tax advantages with your accountant or financial advisor before taking any action.

How do you get a merchant cash advance?

You can Google the term and do your own research to try and find an offer than meets your needs or you can turn to One Park Financial’s funding experts. One Park Financial works with a network of funding sources, and the company’s small business experts will help guide you through the process of obtaining a merchant cash advance. Apply Now to Get Pre-qualified!