Quick answer
Yes, in most cases the factor fee portion of an MCA is deductible as a business expense — typically treated as interest expense or financing cost on Schedule C (sole prop), Form 1065 (partnership), 1120-S (S-corp), or 1120 (C-corp). The legal characterization (purchase of future receivables vs loan) affects exact line-item placement but rarely affects deductibility. Confirm treatment with your CPA — IRS audits of MCA-heavy businesses have increased.
Full answer
MCA tax treatment is more nuanced than 'interest on a loan' because the legal structure is a purchase of future receivables, not a loan. The good news: the factor fee portion (the difference between advance amount and total payback) is deductible in nearly all cases. The complication is where it goes on the return and how it's documented.
The legal characterization matters. MCA contracts almost universally state that the funder is purchasing future receivables, not lending money. This is intentional — it keeps the product out of state usury laws that would otherwise cap effective APR at 12-36%. Most CPAs, however, treat the factor fee as functionally equivalent to interest expense for tax purposes, even if the contract structure is a purchase. The IRS has not issued definitive guidance specific to MCAs, so practice varies.
Most common tax treatment by entity type. (a) Sole proprietor (Schedule C): factor fee deducted on Line 16a 'Interest — Mortgage' or Line 16b 'Interest — Other' depending on CPA preference. Some CPAs use Line 27a 'Other expenses' labeled 'MCA financing cost'. (b) Partnership (Form 1065): typically Line 15 'Interest expense' or other deductions. (c) S-corp (Form 1120-S): Line 13 'Interest expense'. (d) C-corp (Form 1120): Line 18 'Interest'.
Timing of the deduction. The deduction is taken in the tax year the factor fee is actually paid (cash basis) or accrued (accrual basis). For most MCAs with daily/weekly remits, this means the deduction is spread across the months the remits hit your bank account. A 9-month MCA funded in October 2026 typically generates partial deduction in 2026 and partial in 2027.
Documentation checklist for clean deductibility. (1) The signed MCA agreement showing advance amount and payback amount. (2) Bank statements showing the funded deposit and all remit ACH debits. (3) A simple amortization schedule showing the principal portion vs fee portion of each remit (your CPA can build this). (4) Funder-provided year-end statement or payoff statement (many funders provide these on request). (5) UCC filing copy if applicable. (6) Any prepayment discount documentation.
What's NOT deductible. (a) The principal portion of repayments (this is just return of capital). (b) Personal guarantee fees, if any. (c) Stacking fees or default fees IF you're disputing them in court — wait for resolution. (d) Any portion of the fee allocated to broker commission that you're separately invoicing — those flow through differently.
IRS audit considerations. MCA-heavy businesses (restaurants, trucking, small retail with multiple MCAs in a year) have seen increased IRS scrutiny since 2023, particularly around: (a) factor-fee deductions claimed without clear documentation, (b) businesses with sustained losses despite MCA funding (questions about business viability), (c) personal-use comingling where MCA proceeds were used for personal expenses (those portions are not deductible and create taxable income). Keep documentation tight.
Confessions-of-judgment + tax. If a confession of judgment is entered against you and the funder recovers via levy on business bank accounts, the principal portion of that recovery is not deductible (return of capital), but additional penalty fees, interest, and legal costs may be deductible as ordinary business expenses depending on the contract terms. CPA review required.
Bottom line: factor fees on an MCA are deductible as a business financing expense in essentially all common scenarios. The complications are documentation quality and exact line-item placement. Get a CPA who has handled MCA returns before — generalists sometimes mis-classify or miss the deduction entirely.
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