The year is quickly drawing to a close and while many people around the world are reflecting on their accomplishments in 2016 and what resolutions they’d like to keep in 2017, those of us in the American business world are thinking about that dreaded five-letter word: TAXES.

As soon as January first rolls around, business owners, CFOs, and accounting personnel will begin the scramble to get their financial records ready for a thorough inspection by the Internal Revenue Service (IRS). If you’ve used receivables financing services this year, you might wonder what impact it will have on your upcoming taxes. If you’re thinking about using receivables financing in the upcoming year, it’s a good idea to know what the tax implications are right up front.

That’s why we’ve put together this handy introduction to the ins and outs of including accounts receivable financing on your tax return. If you have any questions about our custom lending solutions or how receivables financing might affect your fiscal future, please don’t hesitate to contact The Commercial Finance Group. Although we’re located in Atlanta, we’ve helped businesses all over the country gain access to the working capital they need to ensure many years of success. We’d love to help you too!

Reasons A Business May Use Receivables Financing In A Fiscal Year

Before we get into the particulars of how this type of lending solution may affect your taxes, let’s briefly explore the reasons that a business might engage in receivables financing throughout the course of a fiscal year.

Cash Flow Problems – This is probably the most well-known reason for a small to mid-sized business to finance their receivables. When cash flow becomes restricted for any number of controllable or uncontrollable reasons, businesses have to find a way to get cash fast. Conventional loans are much too complicated and slow-moving to meet this temporary need, so businesses engage in accounts receivable financing to get cash quickly. In many cases, an application for financing can be approved and funding delivered within 5 – 10 days.

Access To Working Capital – Especially when a business is inventory-intensive, such as a clothing or building supply, it’s quite easy for cash to get tied up in physical assets. Unfortunately, you can’t pay the utility bills or employees with inventory. To free up some working capital, many businesses turn to receivables financing so that money can be used for more productive purposes.

Time Savings – When you went into business–no matter what kind of business it is–you probably imagined yourself coming up with product ideas, launching new services, and creating jobs. The last thing you imagined was that you’d be spending your days (and probably a few nights) hounding customers about their unpaid invoices. You’re not a collection agency, after all. Well, when you utilize accounts receivable financing, those unpaid invoices become the responsibility of companies like the Commercial Finance Group. Our professional collection representatives have the time and energy to make sure the invoices are paid so that you can get on with what you really want to do–run your business.

Ability To Land Bigger Contracts – As we detailed in a previous blog, receivables financing can put your company in a position to bid for–and win–large, lucrative government contracts. Providing goods and services for government agencies allows you to earn steady revenue, even when the economy is trending downward. The only problem is the government agencies can take 30 and sometimes 60 days to pay in full. Receivables financing can provide the bridge you need to get from famine to feast after the job is completed.

How The IRS Analyzes Reported Receivables Financing

When evaluating your total tax liability, the IRS examines several aspects of your reported information. In the case of a tax audit, the IRS would want to know:

  • The name and location of your receivables financing company
  • The relationship between your company and the financing company
  • The type of agreement that you have with the financing company
  • How you reported financing expenses on your business tax returns.

It’s that last aspect that causes anxiety for most business owners. How can you know if you’re reporting receivables financing correctly?

“The general rule is that, if you sell accounts receivable to a factoring company, your company will report the amount received as income. If you retain the accounts receivable and receive an advance from the factoring company, that is not considered income for tax purposes. The best option is to have an experienced tax professional review your factoring agreement and ensure you are reporting properly,” explains Factor Funding.

The Sky’s The Limit For Your Success In 2017

If you have questions about how receivables financing may be able to help your business set and achieve even greater goals in the new year, please don’t hesitate to contact us. Our experience financing experts would be happy to review the current state of your business financials and answer any question you may have.