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The answer is: It depends on the type of business entity and the type of taxes you pay. Generally speaking, C-corporations are the only type of business entity eligible for a tax refund. This is because, unlike other business entities, C-corps’ profits are taxed separately from their owners under subchapter C of the Internal Revenue Code. Therefore, if a C-Corp pays more estimated tax during the year than is due on the final return, it can get a tax refund. Other situations where your business could receive a tax refund are if it overpays on payroll or sales taxes.
A common question that tax practitioners often hear from small business clients is “Why doesn’t my business get a tax refund?” Taxpayers, in general, receive a refund only when they have paid more tax than was actually due on their return. The same is essentially true of businesses. However, just like there are different types of taxpayers, there are different types of businesses, and this has an impact on a small business’s tax refund eligibility.
So, how do you know if your business is due a tax refund? There are a few factors you need to look at.
When you started your business, you decided what type of business entity to form, which in turn determined the way the business is taxed by the IRS and state.
Many small businesses elect to form entities that pass their income through to the owners. The owners are then taxed on their individual income tax returns. Because these types of entities pass the taxable income to the owners, the businesses don’t pay tax directly to the IRS and therefore would never receive a business income tax refund.
Types of entities that pass their income through to their owners include:
The only type of business entity that can receive a tax refund is a C-corporation. What distinguishes a C-corporation from other business entity types is that its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. In other words, a C-corporation pays income tax directly to the taxing authorities (using Form 1120). Because of this, a C-corporation could receive an income tax refund if it pays more estimated tax during the year than is due on the final return.
This return would be reflected on the owners, partners, or shareholders’ personal returns based on their total income.
The type of taxes you pay could also result in a tax refund for your business. Let’s take a look at some situations where a business could potentially receive a refund.
Generally speaking, if you’ve paid more than your actual tax liability, you’re due a refund. But keep in mind that business taxes can be complicated. If you are unsure of how your business is being taxed or whether you should be getting a tax refund, you should find a qualified tax preparer, such as a CPA or enrolled agent, to help you.
Many taxpayers deliberately have more tax withheld from their paychecks than is necessary in order to get a large refund each spring. However, overpaying on your taxes as a small business owner reduces the working capital needed to run your business day-to-day. There are better ways to ensure you get a nice refund each spring. Here are a few suggestions:
Although you should never mix business and personal finances, chances are you may have used your personal bank account or credit card to make a business-related purchase throughout the year. This is why we encourage you to take the time to review your personal bank and credit card statements in order to spot business expenses you may have otherwise missed. Your accountant should know how to record these expenses in your books so that they can be reflected on your tax return as a business expense.
If you have enough cash flow, you might want to consider prepaying upcoming expenses for the year like membership dues, insurance plans, and IT services. Prepaying these costs can result in cost savings in addition to minimizing your taxable net income for the year.
There are a number of tax credits available to businesses, including federal and state credits. Taking the time to learn about tax credits your business may be eligible for is a great way to make sure you receive the most money back on your tax refund. Be sure to consult with your accountant about any credits you may be entitled to take, either for the current year or future years.
If you offer a 401(k) plan to your employees, consider offering matching, as well. The amount your company matches for retirement contributions is also a qualified business expense under most circumstances. In addition, it’s a nice thing to do for your employees!
Speaking of being nice to your employees, we recommend offering incentives like bonuses, gifts, and awards. This isn’t just good from an employee-employer perspective, incentives can also be tax deductions. To create incentives that can also serve as tax deductions, review the IRS’s guide to fringe benefits.
If you’re a small business owner, chances are you have to work even when you are at home. If you have an office in your home, you may be eligible for allowances based on the square footage of your office space. You may also be able to claim a portion of your homeowners insurance, utility expenses, and depreciation of your home as business expenses.
For more, view the IRS’s home office deduction rules. Also check out our list of home business tax deductions.
Do you have to travel a lot for business? Keep track of your business mileage. In 2019, the standard mileage rate for business is $0.58 per mile. Therefore, if you traveled 100 miles per week for business, at the end of the year you could get a deduction of $3,016 on your taxes. If you need help tracking business mileage, there are a number of business expense tracker apps that will automatically update your mileage logs.
To bring this full circle, not every business can get a tax refund. However, small business owners who don’t qualify for a business tax refund could still see money back on their individual tax return. There are also many steps you can take to increase the amount of money you get back on your return, such as prepaying expenses and keeping track of tax credits you are eligible for. As with all things tax related, to get the most bang for your buck we recommend working with a qualified tax preparer, such as a CPA or enrolled agent, to help you.