What you’ll learn:
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How to report factored invoices on your taxes
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Tax deductions associated with factoring fees
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Which documents are needed to file taxes when using invoice factoring
Tax season is here! What does that mean for businesses that use invoice factoring? Here’s a quick overview of how accounting for factored receivables works.
Understanding the tax implications of invoice factoring can help you make informed decisions, keep proper records, and work with the right professionals. However, the information provided here is not a substitute for professional advice. Always consult with an accountant if you have questions about your taxes.
Reporting factoring on your taxes
Factoring invoices offers businesses—along with freelancers or contractors—immediate cash flow, but it can complicate your taxes. If you’ve factored invoices this year and are unsure about the tax implications, we’ve outlined key information to help you navigate the process.
Here’s what you need to know about factoring receivables and their tax treatment.
Is money from factored invoices considered income or a loan?
To clarify, invoice factoring is the process of selling your invoices to a factoring company in exchange for immediate cash, minus a fee. The factoring company doesn’t lend money; instead, it purchases an asset (the invoice).
Because this process involves the sale of invoices, the money you receive from factoring is generally considered income and is taxed accordingly.
How are taxes affected by factoring fees and interest rates?
Factoring fees and potential interest payments are common components of invoice factoring. Generally, factoring fees are deductible as business expenses because they are ordinary and necessary costs for the operation of your business.
The IRS typically allows businesses to deduct expenses that are directly related to their operations. However, it’s important to note that if you work with a factoring company based outside the United States, additional tax regulations may apply.
Learn more about tax deductions for invoice factoring.
Is factored income considered a liability?
The liability associated with factoring can vary depending on whether you’re using recourse or non-recourse factoring. This should be clearly outlined in your contract with the factoring company.
- Recourse Factoring: In this arrangement, you retain some responsibility for the invoices. If a client fails to pay, you must either pursue the payment or buy back the invoice from the factoring company.
- Non-Recourse Factoring: With non-recourse factoring, the factoring company assumes the responsibility for unpaid invoices. Once the transaction is complete, you have no further obligation for those invoices.
In the case of non-recourse factoring, the income is not considered a liability.
Does regular, recurring factoring get reported differently than one-off factored amounts?
The reporting process for both one-time and recurring factored invoices is generally the same. In both scenarios, the factored invoices are treated as business income.
Regardless of how frequently you factor invoices, it’s important to maintain clear and accurate records to streamline tax filing. If you work with multiple factoring companies or international factoring partners, you may have additional documentation to manage.
However, frequent factoring may raise questions with the IRS, particularly if the factoring fees seem excessive or if factoring is used in a way that seems out of the ordinary for your business. This could have potential tax consequences.
Will My Factoring Company Send Me Any Documentation to Help Report My Taxes?
Factoring companies typically do not send a tax form like a 1099 for factored invoices. Instead, you will need to rely on your transaction records, which should include all the necessary information for reporting factored invoices as income.
The factoring company will report the fees it charged for the transaction. Be sure to keep records of the income you received and the fees paid.
What if a client pays their invoice after the tax year ends?
One common question is what happens if a client pays their invoice after the tax year has ended. If you sell an invoice to a factoring company in December, but the client doesn’t pay until January, your tax obligations are based on when the factoring company paid you, not when the client pays.
In this scenario, you would report the income on your taxes for the year in which the factoring company paid you.
Are there any tax compliance issues from factoring?
Invoice factoring is generally tax-compliant as long as you report your income accurately. If you have concerns or questions about how to handle specific aspects of factoring for tax purposes, it’s always a good idea to consult with a qualified accountant or speak with the factoring company you’re working with.
Advanced tax implications for factoring
In certain cases, the tax implications of factoring can be more complex. Factoring fees may be subject to sales tax in some states, and certain industries may have additional documentation and reporting requirements.
To ensure proper tax compliance and deductions, it’s recommended to keep organized records for your accountant. Your accountant can assist with reporting your income, navigating state-specific tax laws, and helping you manage any applicable deductions for factoring.
Keep your records organized with Hopscotch and Flow
To make tax season easier, use systems like Hopscotch to keep your invoices and financial records organized. With Hopscotch, you can access your invoices whenever you need them.
Flow, as part of the Hopscotch system, helps you quickly access cash without complicating your documentation.
(Note: The products mentioned are for informational purposes only. Always ensure you understand the services you’re using and how they may affect your tax situation.)
Learn more about Flow and get started with Hopscotch today.
Bret Lawrence
Writer
Bret Lawrence writes about invoicing and cash flow management at Hopscotch. Her previous roles include senior financial writer at Better Mortgage, where she covered lending and the home buying process. Her writing is not financial advice.
