Is Business Funding Considered Income? What the IRS Says

No. Money you borrow is not taxable income, because you have to pay it back — and that repayment obligation is the whole test. Grants and forgiven debt are the exceptions: both are generally taxable to a business. What decides it is whether you still owe the money, not who sent it.

Why borrowed money is not income

A business loan, a draw on a line of credit, an equipment finance advance — none of it is revenue. The reason is structural rather than technical. Income is money you get to keep; borrowed money is money you owe. The proceeds sit on your balance sheet as a liability rather than on your profit and loss statement as a receipt, and they stay there until the balance is repaid.

That distinction matters more than it sounds, because a funding deposit looks exactly like a good month in your bank statements. A $75,000 wire from a funder and a $75,000 run of customer payments arrive the same way. If your bookkeeping codes the first as revenue, your profit and loss statement overstates the year and you pay tax on money you are contractually obliged to give back. Code it to a liability account the day it lands. If you are unsure what your own statements are telling you, our guide to reading a profit and loss statement covers where each line belongs.

The cost side runs the other way, and the asymmetry is what trips up owners doing their own books. You cannot deduct repayment of principal, because you were never taxed on that money in the first place. You generally can deduct the interest and financing cost as a business expense, subject to the limits that apply to your entity and income. Principal is neither taxed nor deductible; the cost of carrying it is deductible. Deducting business loan interest goes through the detail.

Grants are the exception, and they are usually taxable

A grant is money you do not repay, which is exactly why it is treated differently. For a business, a grant is generally included in gross income and reported on the return. Owners get caught by this because the word carries a sense of a gift, and gifts to individuals often are not taxable — but a payment made to a business, to be used in that business, is generally income to it.

The practical consequence is a cash-flow one rather than a philosophical one. Receive a $40,000 state or local business grant in a year you were already profitable and a share of that money is committed to tax before you have spent any of it. Reserve a portion rather than treating the whole amount as available working capital, and confirm the treatment for your entity and for the specific programme, because grant terms vary and a small number are written with a statutory exclusion. That is a question for a tax professional, not for a funding broker. If you are still looking for one, small business grants covers where to search.

Forgiven or settled debt usually becomes income

This is the case that surprises people, and it is the most expensive to get wrong. If a funder cancels or writes off part of what you owe, the cancelled amount generally becomes taxable cancellation-of-debt income to your business. No new money arrives. You were released from an obligation that had never been taxed, and the tax system catches up at the point of release.

It is also reported to the IRS independently of anything you do. A creditor must file Form 1099-C for each debtor whose debt it cancelled by $600 or more, once an identifiable event has occurred. The IRS instructions are explicit that Form 1099-C must be filed regardless of whether the debtor is required to report the cancelled amount as income — so a 1099-C landing in your post is a reporting event, not a verdict. Exclusions do exist, most commonly for insolvency and for bankruptcy, and whether one applies is a calculation against your own balance sheet rather than something the form decides.

This is where a tax rule turns into a funding decision. Settling a merchant cash advance for less than the balance can produce a tax bill in the same year as the relief, and that cost almost never appears in the pitch from a debt-settlement firm. It is one of several reasons consolidating advances and working out of MCA debt are usually better handled as a refinance than as a negotiation. Ask a tax professional what a proposed settlement would cost after tax before you agree to it.

How each type of funding is treated

Most funding a small business uses lands on the same side of the line. The short version, with the caveat that your entity and your facts decide the answer and a tax professional should confirm it:

• Term loan — not income. Liability on the balance sheet; interest generally deductible.
• Line of credit draw — not income. Only the drawn balance is a liability, and the fees and interest are the deductible part.
• Equipment financing — not income. The equipment is capitalised and depreciated, or expensed under Section 179 if it qualifies, which is a separate decision from how the financing is treated.
• Invoice factoring — generally not new income. The revenue was already recognised when you invoiced it; the factoring fee is an expense.
• Merchant cash advance — generally not income, because it is structured as a purchase of future receivables rather than a loan.
• Grant — generally income.
• Forgiven or settled balance — generally income, and reported on Form 1099-C at $600 or more.
• Equity investment — not income. It is capital contributed in exchange for ownership, not a receipt of the business.

What your accountant actually needs from you is smaller than most owners expect: the funding agreement itself, the amount and date of every deposit, a schedule of what you have repaid and how the payments split between principal and cost, and any 1099 you received from a funder. Hand those over at the start of the year rather than at the deadline, because the coding decisions are much cheaper to make once than to unpick across twelve months of transactions.

One thing worth saying plainly, because it is our side of the table: The Broker Shop is a funding brokerage, not a funder and not a tax advisor. We match your file to the funders whose guidelines it fits and let them compete on the offer. How the resulting funding is treated on your return is a question for your CPA, and the answer depends on facts we do not see.

Frequently Asked Questions

Sources: IRS Publication 334 — Tax Guide for Small Business (what a business must include in gross income) · IRS — Instructions for Forms 1099-A and 1099-C (rev. 04/2025) (a creditor files Form 1099-C for each debtor whose debt it cancelled by $600 or more once an identifiable event has occurred, and must file regardless of whether the debtor is required to report the amount as income) · IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments (the insolvency and bankruptcy exclusions from cancellation-of-debt income) · IRS Publication 946 — How To Depreciate Property (Section 179: a $2,560,000 maximum deduction for tax years beginning in 2026, reduced above $4,090,000 of qualifying property placed in service).