Retail cash advances: loans or income?

Tax Adviser, The, February, 2007 by Shevak, Richard

Often, a retailer will enter into an agreement with a supplier under which it receives a large cash payment and commits to purchase a certain volume of goods. The supplier may require the retailer to sign a note obligating it to repay the advanced funds unless certain volume goals are met, and may require a security interest in inventory or other property. The question is how the retailer should treat the payment received.

In light of two recent Tax Court decisions, and the IRS's response thereto, the answer is not clear. A review of these cases may lead one to conclude that whether the cash advance is a loan may be in the eye of the beholder. Unfortunately, if the Service is viewing the transaction, the result may not be good for the taxpayer.

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