Taxes and funding
Short version: money you have to pay back is generally not income. The details depend on what you signed and how your books record it, so here is the general picture to take to your CPA.
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Updated October 13, 2026 · Merchant Fund Express
Under general federal tax principles, the proceeds of a real loan are not income. You received cash, but you also took on an obligation to pay it back, so your net position did not change. That is why loan proceeds do not show up on your return as revenue, and why the matching rule also holds: repaying principal is not a deductible expense.
The IRS looks for a genuine debt: you are legally liable for it, both sides intend it to be repaid, and there is a true debtor and creditor relationship. A deposit labeled "loan" from a friend with no repayment terms can be questioned. Money from a funder under a signed agreement with a payment schedule is the clear case.
| Item | General treatment | Practical note |
|---|---|---|
| Amount you receive | Generally not income for a loan | Not reported as revenue |
| Principal you repay | Not deductible | Reduces the liability on your books |
| Interest you pay | Generally deductible when the money is used in the business | See the interest deduction |
| Fees paid to get the loan | Often spread over the life of the loan rather than deducted at once | Your CPA decides the method |
| Debt that is forgiven | Generally becomes taxable income, with exceptions such as insolvency or bankruptcy | Ask before you settle a balance |
A merchant cash advance is usually written as a purchase of future receivables, not a loan. That changes the legal wording, but most owners still see the same practical pattern: you received cash you must deliver back through daily or weekly remittances. How your accountant books the advance (as a liability, as deferred revenue or another way) and how the cost portion is treated depends on the contract and your accounting method.
Because of that, the safe move is to give your CPA the signed agreement, not just the deposit line on your statement. We cover the practical side in MCA and taxes.
A cleaning company receives $60,000 of term-loan proceeds in March and repays $5,000 of principal plus $1,400 of interest by December. The money paid for two vans and payroll during a contract ramp-up.
| What happened | General tax effect |
|---|---|
| $60,000 deposit in March | Not revenue on the return |
| $5,000 of principal repaid | Not deductible |
| $1,400 of interest paid | Generally deductible as a business expense, because the money went to business use |
| Vans bought with the proceeds | Depreciated or expensed under the equipment rules, separate from the loan |
All figures in worked examples are illustrations of the arithmetic, not offers or quotes. Real terms depend on your file and the funder.
This page explains general principles only and is not tax advice. Talk to your CPA about your own return before you file.
If you are weighing funding now, check where your file stands on the published requirements, or apply in about five minutes. A typical first review does not ask for tax returns; see funding without tax returns.
Generally no. Loan proceeds are not income because you owe the money back. Your bookkeeping should record the loan as a liability, not as sales.
Only the interest portion is generally deductible, and only for the share of the money used in the business. Principal repayments are not deductible.
It is written differently, as a purchase of future receivables, so the accounting treatment depends on the contract and your method. Give your CPA the signed agreement.
Forgiven debt is generally taxable income, with exceptions such as insolvency or bankruptcy. Ask a tax professional before you agree to a settlement.
Not for a typical first review. Files are read from recent business bank statements, and full financials are usually requested only on larger requests.
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