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Understanding Merchant Cash Advance Taxation can be confusing for business owners and tax preparers. Unlike traditional business loans, which have well-defined tax guidelines, MCAs are treated differently because they are not considered loans. This leads to a general lack of understanding of the taxation rules for MCAs.
Cash Advance Amount Tax Guidelines
An MCA is different from a traditional loan; it’s a cash advance on your future sales. This is important to understand when it comes to taxation. While loans are considered debt and are not taxable, the funds you receive from an MCA are viewed as future revenue, which is taxable.
The funds from an MCA are not taxed when you initially receive them from the MCA provider. Instead, you’ll need to pay tax on the revenue used to repay the MCA. So the cash advance amount you received is taxable because it’s a revenue advance to you.
So you have to pay tax on the full original amount that you advanced from the MCA providers, but what about the interest rate and fees? Are they taxable, just like an MCA?
Let’s Look at Possible Tax Deductions
Tax Deductions
Business loan interest rates are tax-deductible. But MCAs do not charge interest. Instead, they calculate the fee for providing an MCA in a different way, called a factor rate. And this factor rate is, unfortunately, not tax-deductible either.
Keep in mind, there may be other fees tied to the MCA that could be deductible, such as origination fees or other fees an MCA company might charge, or fees you incurred as a business processing the MCA or getting legal advice on it, etc.
But because there are no clear tax guidelines on what exact fees and expenses you can deduct, it’s important to keep a record of all fees and costs you incurred during and after you got your MCA that are directly related to it. You can then give all this recorded information to your tax preparer so they can figure out which fees are deductible under commonly used tax guidelines for expenses.
Below is a table of what is not and might be tax-deductible. Please note that most MCA providers do not charge lots of extra fees; the table below just highlights possible additional fees charged.
| Tax Deductible | Amount | Deductible? |
|---|---|---|
| Cash Advance Amount | $20,000 | No |
| Factor Rate of 1.15 | $3,000 | No |
| Origination Fee | $250 | Yes |
| Closing Fees | $100 | Yes |
| ACH Fees | $60 | Yes |
| NSF Fees | $70 | Yes |
MCA Tax Documentation for Tax Reporting
Accurate record-keeping is really important when trying to fulfill your tax obligations on an MCA. Ensure you document all transactions, including the initial total cash advance amount received and all subsequent repayments. This data is not only vital for preparing your business tax returns but may also be required if your business is audited by the IRS. Always keep copies of the MCA agreement, your funding offer, and all repayment receipts.
MCA Tax Reporting
It’s highly recommended to consult a tax preparer for both the preparation and reporting of MCA-related taxes. If you’re interested in learning how to report an MCA on your financial statements, you can refer to our article, “Recording MCAs on financial statements: 5 key steps.”
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The Bottom Line
The initial cash amount you received from the MCA provider is taxable. You will have to pay tax on those funds because they are considered revenue. The factor rate amount you were charged for an MCA is not tax-deductible. You cannot write off that fee. There may be some other fees that the MCA provider charges that could be tax-deductible. However, without clear tax guidelines available for these types of MCA fees, you should consult a tax professional who would be able to determine if these fees can be deducted under existing tax codes and guidelines.