Is a merchant cash advance tax deductible? The usual answer is that the cost of the advance can be deducted as a business expense, but the advance itself and the payments back cannot. The money that lands in your account is generally not counted as income, because it is a financing or a purchase of your future receivables rather than a sale to a customer. The cost, meaning the difference between what you pay back and what you received, fees included, is commonly deducted over the life of the advance. The exact merchant cash advance tax treatment depends on how your agreement is written and how your business keeps its books, so treat this as general information and confirm your own case with a CPA or tax professional before you file.
Merchant cash advance tax treatment depends on the contract
A merchant cash advance is written as a purchase. The funder hands over a purchase price today and buys a set amount of your future receivables, called the purchased amount, which it collects through a set daily or weekly debit. Our guide to how a merchant cash advance works walks through those terms one by one. A business loan is different on paper, because the borrower owes the money back no matter what happens to sales. Our comparison of a merchant cash advance and a business loan covers how the two work in practice.
Whether a particular agreement is treated as a sale or as a loan depends on what the contract says and how it works, not on its title. In a 2020 decision of New York\'s Appellate Division about usury law (not taxes), the court said a transaction is judged by its real character rather than its name, and that courts usually weigh three things to decide whether repayment is absolute: whether there is a reconciliation provision, whether the agreement has a finite term, and whether the funder has recourse if the merchant files for bankruptcy. Courts ask those questions under usury law rather than tax law, but the same clauses are the ones to show your accountant.
The IRS business expense publications we checked do not mention merchant cash advances by name. The IRS discontinued Publication 535, Business Expenses, after its 2022 edition and now sends small businesses to other guides, mainly Publication 334, Tax Guide for Small Business (see the IRS guide to business expense resources). Your tax preparer therefore applies the general rules on income, interest and business expenses to your agreement.
Is the money you receive taxable income?
The money you receive is usually not income, under either reading of the contract. If the advance is treated as a loan, Publication 334 says that money borrowed through a bona fide loan is not income. If it is treated as a sale of future receivables, the common approach is the same at funding. The cash goes on the balance sheet with a matching amount owed, because the business has promised the funder a set amount out of sales it has not made yet. Confirm that treatment with your CPA, since no IRS publication addresses it for this product by name.
Customer sales are still gross receipts and get reported as usual, even though part of them goes back to the funder through the daily or weekly debit. Bookkeepers record the debit as a payment against the advance and leave sales at the full amount.
Do not confuse an advance from a funder with an advance from a customer. Publication 334 says a business on an accrual method generally reports an advance payment for goods or services as income in the year it is received, with a limited option to postpone it one year. That rule is about deposits and prepayments from customers. A merchant cash advance is money from a funder that you have to deliver back out of future sales, so it is recorded differently.
Is a merchant cash advance tax deductible?
The cost of the advance is commonly deductible. The payments, taken whole, are not, because most of each payment returns the money you received. To find the cost, take the purchased amount and subtract the cash that actually reached your account. On the example offer letter below, the funder advances a $50,000 purchase price, takes a $1,500 fee off the top so $48,500 lands, and buys $72,500 of future receivables. The cost is $72,500 minus $48,500, or $24,000. The factor rate is how that cost is quoted, and our explainer on factor rates shows how it is figured.
How that $24,000 is deducted depends on which reading your tax preparer applies.
If the advance is treated as a loan
The cost is generally treated like interest. Publication 334 lets a business deduct interest on a business debt only if three things are true: the business is legally liable for the debt, both sides intend that it be repaid, and there is a true debtor-creditor relationship. The 2022 edition of Publication 535 adds two rules that matter here. When interest or a discount is subtracted from the proceeds of a loan, it is not a payment of interest and cannot be deducted when the loan is received. A loan whose proceeds are less than the amount owed has original issue discount, which is a form of interest generally deducted over the term of the loan, figured with the constant-yield method unless the discount is small enough to count as de minimis. Publication 334 also notes that certain taxpayers must limit their business interest deduction and refers to the Instructions for Form 8990 to check whether that applies.
If the advance is treated as a sale of receivables
The cost is not interest in the IRS sense, because there is no loan. A common approach is to treat the discount and the fees as a cost of financing the business and deduct them as an ordinary business expense. Publication 334 says a deductible business expense must be both ordinary and necessary, which it defines as common and accepted in your field and helpful and appropriate for your business. Timing and the line it goes on are decisions for your tax preparer, and the answer can change with the wording of your agreement.
Under either reading, Publication 334 says the personal part of an expense is generally not deductible, so keep the advance in the business account and spend it on business bills.
When the cost is deducted
The year matters when an advance runs across December 31, which most advances funded in the fall will. Publication 334 says that under the cash method, a business can deduct an expense paid in advance only in the year to which it applies. Under an accrual method, an expense is deducted when all events fixing the liability have happened and the amount can be figured with reasonable accuracy, along with an economic performance test. The common practice for an advance is to spread the cost over the payments, so the part tied to payments made this year is deducted this year and the rest next year. The worked example below shows the split.
How to record a merchant cash advance
A common setup uses three accounts for each advance. The first is a liability account, often named "MCA payable" with the funder's name, which carries the full purchased amount. The second is a contra-liability account, often named "unamortized MCA cost", which holds the discount and the fees until they are expensed. The third is an expense account, such as "MCA financing cost", where the cost lands a little at a time. Your CPA may name or arrange these differently, and may present the advance differently on financial statements a bank or investor will read.
The numbers below are an illustration, not an offer and not tax advice. A funder advances a $50,000 purchase price for $64,000 of future receivables (a factor rate of 1.28) and takes a $1,600 fee off the top, so $48,400 reaches the account. The business pays $2,000 a week for 32 weeks. The total cost is $64,000 minus $48,400, or $15,600. Spread evenly over the 32 payments, that is $487.50 of cost per payment.
| Entry (illustration) | Account | Debit | Credit |
|---|---|---|---|
| 1. Day the advance funds | Cash | $48,400.00 | |
| Unamortized MCA cost (contra-liability) | $15,600.00 | ||
| MCA payable (liability) | $64,000.00 | ||
| 2. Each weekly payment | MCA payable (liability) | $2,000.00 | |
| Cash | $2,000.00 | ||
| 3. Each week's share of the cost | MCA financing cost (expense) | $487.50 | |
| Unamortized MCA cost (contra-liability) | $487.50 | ||
| 4. That week's customer sales, as usual | Cash or receivables | $25,000.00 | |
| Sales | $25,000.00 |
On the day it funds, the balance sheet shows $64,000 owed less $15,600 of unamortized cost, a net of $48,400, which matches the cash received. Nothing touches income. Each week, the $2,000 debit reduces the amount owed, and $487.50 moves from the contra account to expense. The $25,000 of sales in entry 4 is an example week, recorded in full as revenue, with the payment kept out of it. After all 32 payments, the liability is zero, the contra account is zero, and the expense account holds the full $15,600.
Even spreading is the simplest method. An accountant may instead spread the cost so each payment carries a share that shrinks as the balance falls, similar to the constant-yield method the IRS describes for original issue discount. Some businesses expense the fee on the day of funding rather than spreading it. Each choice moves dollars between years, so pick one with your CPA and use it for every advance.
Merchant cash advance accounting at year end
Say the example advance funded in late October and 9 of the 32 payments went out by December 31. The business has paid $18,000 and expensed 9 times $487.50, or $4,387.50. The year-end balance sheet shows $46,000 still owed less $11,212.50 of unamortized cost, a net of $34,787.50. The following year carries the other 23 payments, with $46,000 in debits and $11,212.50 of cost. Your tax preparer decides how each year's amount is deducted on that year's return.
Reconcile the MCA payable account to the funder's statement every month. A missed debit, a returned payment or an added fee shows up there first, and the balance on your books should match what the funder says is left of the purchased amount.
Early payoff, consolidation and settlements
If you pay the advance off early and the funder gives an early payoff discount, the amount you owe goes down. A common entry records the payoff against the liability and writes the rest of the unamortized cost to expense, reduced by the discount you received. The same logic applies when an advance is paid off through MCA consolidation, where the old advance is paid off directly by the new funder. The old advance closes out on your books, and the new one starts with its own three accounts.
Settling a balance for less than the full amount is different and needs a tax professional. If the advance is treated as a debt, IRS Publication 4681 says that when a debt you are personally liable for is forgiven or discharged for less than the full amount, you generally must include the canceled part in income, unless an exclusion applies. How that rule fits a settled advance depends on how the agreement is characterized, so get advice before you agree to a settlement.
What to give your CPA
Your preparer can only apply the rules to what is on paper, so collect these for each advance before tax season.
- Bring the signed agreement, including the reconciliation, default and early payoff clauses.
- Bring the funding statement or settlement sheet that shows the purchase price, every fee taken off the top and the net amount deposited.
- Bring the debit history from your bank statements, or the funder's payment report, for the whole tax year.
- Bring any payoff letter, discount letter or consolidation paperwork that changed what you owed.
Ask your preparer whether your agreement is being treated as a loan or a sale, which year the cost is deducted in, and whether the fee is spread or expensed up front, so the next advance is set up the same way from its first payment.
Applying for an advance
Our guide to revenue-based financing covers how an advance is sized from your deposits and what to compare between offers. We arrange revenue-based financing from $5,000 to $2,000,000, decided mainly on four months of business bank statements and typically funded within one to two business days of choosing an offer. The funders we work with generally look for about a year in business and about $20,000 a month in deposits. If you are not there yet, apply anyway, because some funders work with newer or smaller businesses and we will tell you what is realistic. There is nothing to pay to apply or to see offers. Start an application or call (818) 351-0225.
Frequently asked questions
Is a cash advance taxable income?
A merchant cash advance is generally not treated as taxable income when it is funded, because the business has to deliver a set amount back to the funder out of future sales, and IRS Publication 334 says money borrowed through a bona fide loan is not income. The customer sales that repay the advance are still reported as gross receipts. Treatment depends on how your agreement is characterized, so confirm your case with a CPA or tax professional.
What is considered a merchant cash advance?
A merchant cash advance is an agreement in which a funder gives a business a lump sum, called the purchase price, in exchange for a larger set amount of the business's future receivables, called the purchased amount, which the funder collects through a set daily or weekly debit until it has been paid in full.
How to record cash advance in accounting?
A common way to record a merchant cash advance is to credit a liability account for the full purchased amount, debit cash for the money that actually arrived, and debit a contra-liability account for the difference, then record each payment as a reduction of the liability and move a share of the cost to an expense account each period until both accounts reach zero.
What is the journal entry for cash in advance?
When a customer pays in advance for goods or services, the usual entry debits cash and credits a liability such as unearned revenue until the work is delivered, which is different from a merchant cash advance from a funder, where the entry debits cash, credits a payable for the purchased amount, and records the cost in a separate contra account.
What is cash advance accounting?
Merchant cash advance accounting is the way a business tracks an advance in its books, normally as a liability for the purchased amount with the cost spread to expense over the payments, so revenue stays at the full amount of customer sales and the balance on the books matches what the funder says is still owed.
