SBA financing vs Taxes & Section 174
January 18, 2024
by a searcher from University of Maryland at Baltimore in New York, NY, USA
I found a business I'm very interested in purchasing. It's almost tailor made to my experience and I have a number of ways to grow the company. But I've hit a snag on SBA financing.
The majority of the business' expenses are on software development. Because of recent tax law changes (Section 174), these expenses end up affecting the underlying income number on the 2022 taxes. Though all the underlying numbers are more or less the same between 2021 and 2022, the tax returns show a significant drop in "income" from 2021 to###-###-#### Again, the numbers haven't really changed, it's just how they're bucketed which determines where they show on the returns. But this has caused issues with lenders already.
I've spoken to 2 lenders who have looked at the tax returns, see page 1 where "Ordinary Business Income" on the Summary of Schedule K-1 dropped precipitously from 2021 to 2022, and immediately got scared off. I tried explaining how if you look on page 6 you can see how the math works - you've just taken 600k from bucket a and put it in bucket b and the math all works out the same in the end - but they haven't been interested in hearing it.
Does anyone have any experience with this?
from The University of Chicago in Chicago, IL, USA
I am sure there are lenders who will understand. I agree with ^redacted suggestion. Others I can think of are ^redacted and ^redacted.
from James Madison University in Washington, DC, USA
With that being said I’ve worked with a few great SBA lenders who take a more business minded approach to lending. I’d be happy to introduce you if interested DM me.