Are merchant cash advances tax-deductible?

Key Takeaways

Merchant cash advances (MCAs) are not taxable income and repayments are not deductible—but fees, factor rates, and administrative charges may be claimed as business financing expenses.
Only the cost of accessing the MCA (not the repayment itself) is tax-deductible, so accurate bookkeeping and separating fees from principal are essential for correct reporting.
Common tax mistakes include misclassifying repayments or failing to isolate costs, which can inflate deductions and raise audit risks—professional advice and clear records help avoid issues

Add a header to begin generating the table of contents

Page written by Ashlyn Brooks. Last reviewed on May 13, 2025. Next review due October 1, 2026.

Merchant cash advances (MCAs) offer fast access to capital, especially for businesses needing immediate working capital. But when tax season rolls around, many business owners are left asking: Are merchant cash advances tax deductible?

Here at Swoop, we understand that navigating financing and taxes together can be overwhelming. That’s why this guide breaks down how MCAs work, what you can and can’t deduct, and how to avoid costly tax mistakes, so you can manage your funding and taxes more confidently.

Add a header to begin generating the table of contents

What is a merchant cash advance (MCA)?

A merchant cash advance is a type of financing where a business receives a lump sum of cash upfront in exchange for a portion of its future sales, usually credit card or debit card receipts.

Instead of fixed monthly repayments like a traditional loan, the lender automatically deducts a set percentage of your daily or weekly sales until the total owed (the advance amount plus fees) is paid back.

How MCAs differ from traditional business loans

While both MCAs and business loans offer access to capital, their structures are quite different:

Feature	Merchant Cash Advance	Traditional Business Loan
Repayment Method	% of daily/weekly sales	Fixed monthly payments
Structure	Sale of future receivables	Loan of principal + interest
Collateral	Usually unsecured	May require collateral
Cost Structure	Factor rate and fees	Interest rate and fees

Understanding this difference matters for taxes, because MCAs are technically an advance on future sales, not a “loan” in the traditional sense.

Are MCAs considered income or debt?

A merchant cash advance is not considered income because you’re receiving money against sales you’re expected to generate in the future.

It’s also not technically classified as a loan under tax law, which can cause confusion. Instead, it’s treated as a commercial transaction: you sold a portion of your future receivables at a discount in exchange for immediate cash.

Important note: Since the advance isn’t income, you don’t report the entire MCA amount as taxable revenue. However, how you treat associated costs matters when preparing your business taxes.

Can you deduct a merchant cash advance on your taxes?

This is where things get specific:

The advance amount itself

You cannot deduct the full advance amount you receive because it isn’t considered income or a business expense. It’s simply an advance on your future sales.

Fees and factor rates

However, fees, financing charges, and factor rates associated with the MCA may be deductible as business expenses, just like you would deduct interest paid on a regular loan.

What parts of an MCA may be tax-deductible?

Here’s what you can typically deduct:

Cost of capital or financing fees

Most of the cost of accessing an MCA, such as the factor rate fee (e.g., if you agreed to repay $12,000 after receiving $10,000), can usually be written off as a financing expense.

Example:
You received a $50,000 MCA and agreed to repay $65,000.
The $15,000 cost may be deductible as a business financing expense.

(Always confirm how your lender breaks down their costs; some blend fees into the total without transparency.)

Processing or administrative charges

Any administrative or servicing fees related to setting up the MCA are generally considered deductible business expenses.

MCA repayments and tax implications

Repayments are not deductible as business expenses

It’s a common mistake: businesses assume they can deduct their MCA repayments like loan payments. In reality, repayments are not deductible because you’re simply repaying an advance, not incurring a new deductible expense.

Only the associated costs of obtaining the advance, like fees and financing charges, are eligible for deductions.

Only fees and costs may be deductible

Focus your tax reporting on deducting legitimate fees and costs rather than repayments. This distinction matters if you’re audited.

How to properly record an MCA for tax purposes

Good recordkeeping makes MCA tax treatment much easier:

Recording the advance

Record the lump sum received as a liability on your books (not income).
Set up a separate account for “Merchant Cash Advance Payable.”

Tracking fees and costs separately

Clearly record all upfront and ongoing fees.
Use your bookkeeping system (or accountant) to separate principal repayments from deductible expenses.

If you lump repayments and fees together in your records, you risk missing deductions or misstating income.

Working with an accountant or tax advisor

MCAs can easily tangle up your books if not tracked carefully. An accountant familiar with commercial financing structures can:

Classify your MCA correctly
Maximize legitimate deductions
Prevent costly filing mistakes

Common tax mistakes with merchant cash advances

Treating repayments as deductible expenses

Remember, only fees and financing costs, not the repayment of the principal advance, can be deducted.

Mistake Example: Deducting $5,000 of repayments each month instead of isolating the $1,000 monthly fee component. (This inflates deductions and triggers red flags if audited.)

Not separating fees from principal

Failing to track fees separately makes it hard to justify deductions to the IRS and could delay tax filings or invite penalties.

Quick tip: Ask your MCA provider for a detailed cost breakdown at the time of funding—it makes year-end tax prep much easier.

Alternative finance options with clearer tax treatment

If the tax complexity of MCAs feels burdensome, consider these alternatives:

Business term loans

Traditional business term loans have simple tax treatment: you can deduct interest paid over the year without separating principal and fees.

Equipment financing

Loans secured by equipment purchases often offer clear interest deductions and depreciation benefits tied to the assets themselves.

Revenue-based financing

Revenue-based loans (similar to MCAs but often with clearer repayment terms) still require careful tracking but may offer more transparent agreements about fees and costs.

Get started with Swoop

Managing tax impacts is a key part of choosing the right business financing. If you’re considering a merchant cash advance or exploring other options with clearer tax benefits, Swoop can help you compare the best solutions for your situation.

Check available business loans today and find funding that supports both your immediate growth and your long-term financial health, with fewer surprises at tax time.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

Swoop promise

At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.

Find out more about Swoop’s editorial principles by reading our editorial policy.