If you’re in the trucking business, you may wonder whether you have to pay taxes on factored receivables. The answer is that it depends. You have to pay taxes on most receivables, but factoring fees can usually be written off on your tax filing. To find out what applies for you, consult a tax professional for the best advice. In the meantime, here’s a rundown of how taxation on factored receivables works in some situations.
Invoice factoring explained
Invoice factoring is when businesses sell their invoices to a third-party financing company for an interest rate. This helps them get money faster and more easily. It’s important because it allows companies to grow and make more money. The main advantage is fast cash flow, but the service isn’t free.
Must-know factoring bookkeeping terms
- Recourse: Recourse means that a company can take its money back if the person it gave it to does not pay it back. It’s used in invoice factoring services, which is when a company gets money right away based on outstanding invoices that have not been paid yet. Invoice factoring arrangements involve businesses in specific industries, such as trucking, selling their unpaid invoice amounts to a third party instead of taking out a small-business loan from a traditional bank. The third party pays the business upfront and then collects payments from the customer who owes money on the invoice.
- Nonrecourse: Nonrecourse factoring means that if there is nonpayment on invoices by the customer in rare situations, the invoice factoring company cannot ask you to pay back the money it gave you. Read the fine print before entering such an agreement. Nonrecourse agreements are typically just a way for the factoring company to charge you more.
- Accounts receivable: Accounts receivable financing means that when a company sells something to another company or person, the seller can get paid quickly by borrowing money from a lender on the amount owed to it. This is also called invoice factoring
- Bill of lading: A bill of lading (BOL) is a document used in the shipping of all goods in the U.S. These documents are also submitted in invoice factoring transactions. It shows that goods were shipped and received.
- Federal Motor Carrier Safety Administration: The Federal Motor Carrier Safety Administration is responsible for making sure companies that transport goods over long distances are safe and compliant. Invoice financing is using money owed from an invoice to get immediate cash to pay for business expenses.
- Operating authority: Operating authority is what any trucking company owner must have to run their own trucking business. This is done by procuring an MC number through the FMCSA. You must have operating authority to use an invoice factoring company.
- Rate confirmation: A rate confirmation is an agreement between a carrier and a shipper or broker that shows the agreed-upon rate, terms, conditions and pick-up or drop-off locations. All factoring companies will ask for this document before an invoice is purchased.
- Uniform Commercial Code: A Uniform Commercial Code (UCC) is legally filed after an agreement is signed and protects the lender/creditor if there are payment issues. It also serves as a notice to other creditors regarding their financial interest in a company. A business can only have one invoice factoring company at a time, and its UCC must be terminated in order to sign with another company.
- Working capital: Working capital is the amount of money a company has available. It includes the money it has in the bank that can be spent on business expenses.
Are factored receivables subject to tax?
This can be a complex question. You consult a tax professional for the most accurate and applicable advice for how you handle your company’s finances and tax responsibilities.
Location of the factoring company
When U.S.-based companies choose to use offshore factoring lenders, especially those with parent companies located overseas, it can create a unique set of financial and tax implications. Invoice factoring fees include the advance rate and are an aspect that businesses need to consider when choosing a factoring company.
Deductions
Factoring fees are considered “ordinary and necessary business expenses” and may be deducted from taxable income when filing taxes. But business expenses aren’t always deductible and you should consult a tax professional to know for sure.
Tax effects of factoring
Using a factoring company can have several positive tax effects for businesses. First, it can reduce the amount of taxes a business may have to pay on its accounts receivables. This is because when a business sells its receivables to a factoring company, the fees from that sale are not counted as income and are not subject to tax.
When are sold receivables not taxable?
Whether sold receivables are taxable or not typically depends on the circumstances of the transaction. Receivables may be exempt from taxation if they were not created to generate taxable income. This occurs, for instance, when a company offers customers incentives or credits for purchasing goods or services.
What if your company has a tax lien?
Tax liens can have a major impact on your company’s income. Factoring companies will typically check to see whether you have them before completing a factoring agreement. A tax lien is a legal claim made by a government agency or other entity for unpaid taxes. If the government is in the first lien position, the factoring company will have to make a risk decision.
How do you report factoring expenses as deductions on tax returns?
Factoring expenses are deductible on tax returns, which makes them a worthwhile option for small businesses. To take advantage of this deduction, you must complete the proper paperwork to show the line-item expenses of the factoring costs. It’s important to understand how these deductions work to avoid trouble. Talk it over with a tax professional.
Ensure you’re paying the right tax amount if using a factoring company
By understanding the different types of taxes you may be able to write off when using a factoring company, you can ensure that your business is paying the right amount. While some tax obligations are unavoidable, there are steps you can take to minimize them. Taking the time to research and work with qualified professionals will help keep more money in your pocket. It also helps you remain compliant with all applicable laws and regulations. With careful planning and attention to detail, you can easily manage any factoring company tax write-offs.
FAQ
Yes, there are fees associated with factoring receivables.
Yes, companies typically pay taxes on account receivables depending on jurisdiction and business types.
Most business expenses are tax deductible, but you should talk to a tax professional to know for sure whether specific deductions apply to your business.
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