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Can You Write Off a Merchant Cash Advance?

If you’ve taken out a merchant cash advance (MCA) for your business, one question that may come up is: are merchant cash advances tax deductible? The short answer, is yes – but there are some important details and conditions to understand. Let’s break it down.

What is a Merchant Cash Advance?

A merchant cash advance is a type of financing or loan that provides upfront capital to a business. With an MCA, the lender purchases a portion of the company’s future credit card sales or revenue at a discount. The business then repays the advance, plus fees, through either a percentage of daily credit card receipts or a fixed weekly amount withdrawn from the business bank account.

How MCAs are Viewed by the IRS

Here’s the key point when it comes to tax deductions: the IRS views merchant cash advances as loans, not income. This is an important distinction because it means the upfront lump sum from the MCA is not considered taxable income when received.

However, the interest or fees paid on the MCA are considered tax deductible business expenses, just like interest on any other business loan. So while you can’t deduct the full MCA advance amount, you can deduct the interest or fees paid to obtain that advance.

Maximizing MCA Interest Deductions

To maximize your potential tax deductions related to a merchant cash advance:

  1. Keep detailed records of MCA interest/fees paid each year.
  2. Deduct the full amount of interest/fees as a business expense.
  3. For larger MCA amounts, consider deducting the interest over the life of the advance for greater deductions.
See also  Delaware Merchant Cash Advance Debt Relief Lawyers

But what if you default on the MCA? In this scenario, any remaining interest or fees owed would become deductible in the year of default.

Potential Red Flags for the IRS

While properly deducting MCA interest is allowable, there are some red flags that could raise eyebrows at the IRS:

  • Taking out multiple, very large MCAs in a short period
  • Using MCA funds for personal expenses vs. business purposes
  • Inability to document interest/fee deductions due to poor recordkeeping

To avoid scrutiny, make sure your MCA use aligns with the funding needs and financial situation of your business.

Alternative Funding Sources to Consider

Merchant cash advances can provide fast working capital, but also come with high costs through interest/fees. As an alternative, businesses may want to explore:

– Traditional bank loans or lines of credit
– Invoice financing
– Business credit cards with 0% intro APR promotions
– Investors or venture capital
– Crowdfunding campaigns

Each option has pros and cons, so evaluate your business’ financials to determine if an MCA or other funding method is most suitable.

When to Consult a Tax Professional

For large MCA amounts or complex situations, it’s wise to consult a qualified tax professional or CPA. They can ensure you are properly deducting MCA interest based on your specific circumstances and minimizing your tax liability.

The rules around deducting MCA interest can be nuanced. So if you’re unsure about anything, get expert tax advice – it could end up saving you considerably more than the cost of the consultation itself.

See also  Massachusetts Business Debt Settlement Lawyers

In summary, yes merchant cash advances can provide valuable upfront capital, and the interest paid on these advances is tax deductible for your business. Just be sure to carefully track and document the details to maximize your allowable deductions.

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