As a small business owner, you pride yourself on being well-informed and try to run your business smartly and efficiently. You've looked into cash advances, and you can see the advantages. Besides the fact that you won't spend weeks gathering documents for the bankers, a cash advance is there right when you need it - not a "possibility" that takes weeks of processing time.
Along with these significant advantages, the advance is repaid in a year or less, so no long-term debt will be hanging over your head. You keep your freedom and your decision-making ability, something neither banks nor investors can guarantee you. It just makes sense to get a cash advance to help move your business forward this year, but you have one area of concern - How will a cash advance impact your taxes? Turns out there's good news on that front as well.
Tax Implications of Cash Advances
Although cash advances are not loans, they are advance payments on future sales, which make them exempt from taxes at the time of the advance. Business owners will pay taxes on their income, even the income that goes to back to the cash advance company to repay the advance. You do not pay on the lump sum when it is advanced.
Furthermore, you can deduct the fees paid to the cash advance company as a business expense, just as you would deduct any other fees paid by the business. In effect, merchant cash advances have a neutral effect on the taxation of the business. They don't shelter any of the business's income from taxes, but neither do they subject it to any more taxation than it otherwise would be.
When it comes to taxes, cash advances are treated much the same way as loans even though they are not loans.The advantage for your business is that the money is available when it is most needed or when it provides the greatest advantage. Without financing, it would be next to impossible for many small businesses to expand, open a second location, or hire employees that will allow their businesses to grow.
How to Treat a Cash Advance for Tax Purposes
When depositing money from a cash advance into your business account, it can be treated as a pass through or in the same way that loan proceeds are treated, even though it is not classified as a loan. The correct designation would be an advance payment to which liability is attached. Do not report any cash advance money received as income.
As money is deducted from daily credit card receipts, you can deduct the portion that represents the fee paid. Your cash advance provider or your accountant may be able to give you information about how to calculate this amount, or if the advance is repaid all in the same calendar year, the entire fee can be deducted at that time.
It is always best to consult with your accountant or tax adviser to discuss your individual situation. This information is provided as some possible benefits of a cash advance. Quikstone Capital Solutions provides merchant cash advances to qualified businesses that want to grow and thrive. Apply now to see how your business can benefit.
