Expenses Offset Revenue and How They Impact Your Tax Liability

As business owners, one consideration you need to make is how your expenses offset revenue and how they impact your tax liability. It isn’t as simple as “that is an expense and I can write it off”, but there are expenses that are a part of doing business and are allowable by tax guidelines.

One of these is (yep, you guessed it!) Merchant services fees. They are a straight line expense.

Now, what if you eliminate the 2% to 3% in fees and start assessing a service fee instead?

More money in revenue, right?

Right.

But. You have now eliminated the expense deduction.

Should I Add a Service Fee Program?

We are definitely seeing the trend of passing on the processing expense to the customer; but this is not a decision to make lightly.

1. Check to see if your state allows this; some states don’t.
2. Think about how this will impact your relationship with your customers. From a marketing and image standpoint, a cash discount is often seen in a better light than adding a service fee. It is really the same thing, but the perception of the customer is different.
3. Equally important, have a conversation with your CPA, accountant or financial advisor on how this will change your revenues and your business write offs.

Will my expense deductions impact taxes?

Consider a 2% to 3% processing fee, which can be deducted from your gross revenues versus assessing a 2% to 3% service fee (again, whatever is allowable by your state’s laws – you cannot charge more than you are paying.) This “fee” is now considered revenue and could be a 4% to 6% swing.

Potential impact to your P&L:

• You have no deduction, but you still have “employee effort and time” to process transactions.
• If you are a franchisee, you will be paying royalties on the total sales received.
• If you are on the cusp of a tax rate, you could potentially move from one bracket to another.

As a reference point, the new 2022 tax rates are 10%, 12%,  22%, 24%, 32% and 35% for personal taxes, which will be the same for an owner of an LLC.  And in 2023, the corporate tax rates will go from 19% to 25% which is a six point change.

Impact of changing payment processing

Our recommendation is to consider a fee change seriously, weigh all of the potential impacts to your bottom line and consult with an advisor for guidance. TransAct is available for free consultation on this topic and all of your merchant services and payment processing needs.