As an individual, you’ve probably received (or have at least dreamed about receiving) a tax refund before. If you have, you’ve probably wondered at some point, Can a small business get a tax refund? Well, wonder no more. That’s where we come in to help.
Can a small business get a tax refund? Factors to consider
Do businesses get tax refunds? To answer that question, we have to look at a couple of factors. Whether or not a business can receive a tax refund depends on the following:
- Your business structure
- The types of taxes you pay
A business does not have to have both factors to be eligible for a business tax refund. Let’s take a look at how these factors can impact business tax refund eligibility, shall we?
Type of business structure
The first factor that determines if you can receive a business tax refund is your type of business structure. As a reminder, here are the different types of business entities:
- Sole proprietorship: Business owned and operated by one person.
- Partnership: Company that two or more individuals own and operate together. There are different forms of partnership, including general and limited.
- Corporation or C Corp: Separate legal entity from its owners. By law, a corporation is treated as an independent legal entity.
- S corporation or S Corp: Type of corporation where profits and losses are passed through directly to the owner’s personal income without being subject to corporate tax rates.
- Limited liability company (LLC): Combines the pass-through tax benefits of a partnership with the limited liability of a corporation. This structure separates business and personal liabilities.
When you first start your business, you select which entity to form. The structure you select determines the way the state and IRS tax your business.
Many small businesses decide to choose a structure that allows income to be passed through the owners, aka pass-through taxation. With pass-through taxation, the tax passes through the business, making it so the business does not directly pay the tax. Then, the business owner pays the tax on their individual tax return. Pass-through taxation structures include sole proprietorships, partnerships, S corporations, and LLCs.
Because these types of entities pass the taxable income onto the owner(s), the companies don’t pay tax directly to the IRS. Therefore, businesses with pass-through taxation cannot receive a business income tax refund. However, they can potentially receive a personal income tax refund. And, pass-through entities may be qualified for a 20% pass-through deduction.
Which business structures can receive a refund?
Phew, that was a lot of information to digest. So, which business entities can receive a tax refund? The short answer: corporations.
A corporation can receive a business tax refund. Because C Corps are taxed differently than other types of entities, they can receive a refund. Basically, a corporation’s profits are taxed separately from its owners and the C Corp pays income tax directly to tax authorities.
A corporation could receive an income tax refund only if it paid more estimated tax during the year than what was due.
If you own a corporation and pay income tax directly through the business, you may be eligible for a refund.
The type of taxes you pay can also determine whether you receive a business tax refund. Here are some scenarios where you might receive a refund:
- Payroll taxes: Regardless of your business entity type, you could potentially receive a refund if your company withholds and pays payroll taxes. If you overpay on payroll taxes (e.g., calculation error), you could be eligible for a tax refund. Some businesses (e.g., restaurants) may also receive a tip credit. The tip credit can be used to reduce the income tax owed by the employer, thus resulting in a refund.
- Income taxes: Again, C corporations are the only business entity that can receive a refund of income tax. Owners, partners, or shareholders would receive a refund on their personal returns based on their total income.
- Sales or excise taxes: Most businesses have to pay sales or excise taxes. In some cases, a business may be subject to a tax refund if there is an overpayment of these taxes or a reassessment of the property value.
Generally, if you paid more than your actual tax liability, a refund is more than likely coming your way. However, it is not guaranteed. To learn more about whether you’re eligible for a small business tax refund, consult a tax professional or the IRS.
How business tax refunds work
Business tax refunds work similarly to regular tax refunds for individuals. Essentially, you need to pay the IRS more during the year than your total tax bill to receive a refund. This means you pay an estimated amount of tax plus more to get a refund.
Although there are plenty of perks to business tax refunds (hello, it’s money), there is a downside to receiving one. With a small business tax refund, you don’t receive your money until tax season. That means that the IRS is holding your money without interest for the year.
Business taxes can be a bit of a balancing act. Sure, you want to pay the correct estimated taxes so you can avoid penalties and fines. However, you don’t want to pay too much. If you do pay extra, you’ll have to wait for your refund, preventing you from using the money during the year.
Tips for maximizing your business tax refund
Many taxpayers have more tax withheld from their paychecks on purpose to get a larger refund come tax time. But, is there a way to maximize your small business tax refund? Luckily, you have a few options as a business owner.
Rather than overpaying on your taxes each year, take advantage of other ways to maximize your business tax refund. You can:
- Prepay expenses in advance
- Find out if you’re eligible for tax credits
- Research business tax deductions
- Review personal credit card and bank statements for business expenses
- Contribute to a retirement plan (e.g., 401(k) matching)
- Write off bad debt
In addition to the above options, consider consulting an accounting professional to find out the best ways for your business to maximize its refunds. It never hurts to get a second opinion, especially when it’s coming from a tax expert.
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This is not intended as legal advice; for more information, please click here.