Tax Implications of Merchant Cash Advances

Tax papers with clock and "tax time" notice

It is crucial for business owners to understand the tax implications of a merchant cash advance (MCA). A business owner who obtains a merchant cash advance is basically pledging a percentage of the business’s future sales to the funder in exchange for a lump-sum payment up-front. If the business defaults on the cash advance, the cash advance provider can move quickly to seize the business assets. 

At ReconcileMyMCA, we regularly advise business owners about the tax implications of merchant cash advances and work to find real-world solutions in the event of default. Whether you are considering taking a merchant cash or you already have and cannot meet the repayment plan, we can help. Contact us today by completing the convenient intake form.

Merchant Cash Advances and Income Tax Implications

The first thing to know is that merchant cash advances are not reported as income. An MCA is an advance against a business’s anticipated future income. It provides the business with a lump sum of cash, which is paid back through automatic withdrawals of a percentage of the business’s daily credit card sales. Because the advance is not considered income, it is not taxed; however, income used to pay back the advance is taxable. 

Tax Deductions on Merchant Cash Advances

Merchant cash advances are not tax-deductible because they are not loans and do not charge interest. However, the business owner may be able to deduct the fees associated with the advance as a business expense. As payments are deducted from the daily credit card receipts, the portion representing fees may be deductible, provided that the business is entitled to take a deduction.

By contrast, the interest on a business loan is generally deductible because it is considered a business expense by the IRS. The loan proceeds must be spent,  however, and cannot be used for investment purposes. In any event, it is crucial to consult with your tax adviser to ensure deductions are accurately calculated. 

What Else You Need to Know About Merchant Cash Advances and Tax Implications

In addition to understanding the tax implications of merchant cash advances, it is worth noting that MCAs are generally not regulated, unlike consumer loans and business loans. State usury laws do not apply, and the courts have generally ruled that merchant cash advances are not loans, but rather purchase and sales agreements of a business’s future receivables. 

Also, a merchant cash advance is not based on an interest rate. The funder will charge a factor rate, which is expressed as a decimal figure (not a percentage), usually ranging from 1.2 to 1.5. When the factor rate is converted into an interest rate, however, the figure could rise to the triple digits. 

What happens if my business defaults on a merchant cash advance?

If your business experiences a downturn and cannot repay a merchant cash, both your business and personal assets are at risk. First, a merchant cash advance typically includes a Confession of Judgment. This is basically an agreement in which you automatically accept liability for the advance and waive any legal defenses. In the event of default, the funder has the right to file a judgment with the court and levy the business’s assets. Also, it is becoming common for MCA providers to require business owners to sign a personal guarantee, which means the funder can seize your home, bank accounts, and other personal assets. 

Why You Need a Merchant Cash Advance Attorney

If your business has taken a merchant cash advance and cannot meet the repayment terms, you may be forced into both a business and personal bankruptcy. This is the time to contact Our experienced merchant cash advance attorneys can help to explore all of your options. 

An MCA agreement typically includes a reconciliation clause that requires the funder to restructure the payment if the business experiences a receivable shortfall. We will negotiate with the MCA provider to reconcile your merchant cash advance and restructure the repayment plan.

We know how to fight back against the tactics funders use to bully small business owners. If the MCA provider fails to reconcile your merchant cash advance, we will take them to court for breach of contract. Above all, we will make your rights are protected and help you save the business you’ve worked so hard to build. 

Contact Today

While the tax implications of merchant cash advances are minimal, the consequences of defaulting on an MCA agreement are serious. Contact our office today so we can get work reconciling your merchant cash advance. Please complete the convenient intake form now; our debt relief specialists are available 24/7.