Can a Small Business Get a Tax Refund?

A Small Business Get Tax Refund

A small business can potentially receive a tax refund if it has overpaid taxes throughout the year. The amount of the refund will depend on the specific circumstances of the business, including its taxable income, deductions, and credits. To determine if a small business is eligible for a tax refund, it is important to review the business’s tax returns and financial records. This will help identify any potential deductions and credits that may have been overlooked, as well as any errors or inaccuracies that may have resulted in overpayment of taxes.

‘Why doesn’t my business get a tax refund’ is one of the most common business accounting questions that tax practitioners get to hear from small-business clients. When more tax than due on their return has been paid by the taxpayer, then a refund is initiated. This also applies in the case of businesses. But since there are various taxpayer types, there are various business types and hence this greatly impacts the tax refund eligibility of the small businesses as well. Generally speaking, it is the C-corporations, as the only type of business entity that is eligible for a tax refund. Also, in case there occurs an overpay on payroll or sales tax, then also the business in concern may receive a tax refund. For this here are the factors to consider:

The Business Entity Type

When an individual starts a business, then it is decided by the individual about the type of business entity to form. This in turn determines the manner in which one pays the small-business taxes to the state and the IRS. 

Most small businesses choose to form entities that pass their income through to the owners. Then it is the owners who tax their individual income tax returns. Hence, because of these entity types that pass the taxable income to the owners, the taxes are not paid directly to the IRS by the businesses, and hence should not receive the income tax refund.

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Such entity types that pass their income through to the owners include:

  • The Sole Proprietorship: This is the single-owner business type that is required to report their expenses and income on the owner’s tax return- Tax Form 1040 by using Schedule C.
  • Partnership: This is an unincorporated business that comprises two or more owners. Here the owners file a Form 1065 and issue the Forms K-1 over to the partners that include the income and pay the taxes on the individual returns.
  • S-Corporations: This is the corporation type that has elected to pass the taxable income from the business over to the shareholders. Most S-corps need to file a Tax Form 1120 S and issue a Form K-1 over to each shareholder, who reports the income and pays the taxes to their returns.
  • Limited Liability Company-LLC: This is the case when the business owners are required to report the income pass-through companies to include the income along with the other sources like interest, wages, dividends, gains and the sales of the property or rental income, all on their 1040s. The individual owners can receive a refund only if the total payment and the withholding tend to exceed their total tax liability on the return.

It is only the C-corporation which as an entity can receive the tax refund. The factor that distinguishes a C-corporation from the other business type is the fact that the profits are taxed separately under Subchapter C for its owner of the Internal Revenue Code. Subsequently, the income tax is paid directly to the taxing authorities with the help of Tax Form 1120. It is due to this, that the C-corporation is eligible to receive an income refund if the estimated tax is paid more than the estimated tax for that year that is due on the final return.

The Tax Type

The tax refund also depends on the type of taxes paid by you for your business. Let us take a look at some of the cases where the business could receive a refund:

  • The Income Taxes: The refund for the income taxes can only be received by the C-corporations, as previously discussed. Here, in this case, the shareholders, owners and partners are eligible to receive a refund on their returns according to their total income. 
  • The Payroll Taxes: A business type is eligible to receive the refund of the income taxes irrespective of the entity type, if you withhold and pay the payroll taxes. Certain restaurants might also receive a tip credit that is a tax credit which can be claimed by an employer to recover the FICA taxes paid on the tips that are received by the employees. Hence, one can expect a refund if a tip credit can be utilized to reduce the income tax owed by the employee. 
  • The Sales or the Excise Taxes: There are quite a few businesses that are subjected to the sales or excise taxes that are generally assessed by the municipalities or the state. In some other cases, either an overpayment of the taxes or the reassessment of the property value can result in a refund for your business.

Maximize the Tax Refund

Some taxpayers deliberately own more taxes that are withheld from their paychecks than what is necessary for it to get a larger refund every Spring. Nevertheless, overpaying your taxes as a small business owner can bring down the working capital required to run the business on a daily basis. However, there are various better ways to ensure that one gets an appropriate refund every Spring. Here are a few major suggestions for the same:

  • Personal Bank and Credit Card Statement: Review

It is advised to never mix the business and the personal finances as you might have used your bank account or Credit card to make business-related purchases all around the year. Here, you need to review your bank and credit card statements for the business expenses that you might have missed otherwise. In this case, the business accountant needs to know how to record the expenses in the book so that they can reflect on the tax return as a business expense.

  • Prepay Upcoming Expenses

In case of enough cash flow, it is advised to consider prepaying the upcoming expenses for the year, for example like that case of membership dues, IT services and insurance plans. The prepayment of these expenses can result in cost savings along with the minimizing of your taxable net income for the year.

  • To Check for Tax Credits

There are quite a few tax credits that are available to businesses. These include state and Federal credits, hence it is advised to take time and interest to learn and understand what tax credits your business might be eligible for. It is a good idea to consult with your accountant regarding any credits that one might be entitled to claim which can be for the future or the current year.

  • Offer 401(K) Matching

If the 401-K plan has been offered to your employees you might consider matching as well. The amount that is matched for the retirement contribution also falls under the qualified business expense under most circumstances. Additionally, it also benefits your employees.

  • Reward the Employees

Offering incentives like bonuses, gifts and awards is quite a nice idea to be nice to the employees. Not that it is good from the employee-employer point of view, but also the incentives can be great tax deductions. To create incentives that can also serve as tax deductions, one needs to review the IRS guide for fringe benefits.

  • The Home Office Deductions

There are times when the small business owners have to work from home as well. Hence, if you have an office at home, then you are eligible for a home office deduction as well. This is nothing but the allowances that are based on the square foot of the office space that you own within your home. Likewise, there are chances that one can also claim a portion of the homeowner’s insurance, the utility expenses and the depreciation of the home as business expenses.

  • Tracking Mileage

Certain businesses involve a lot of travelling to do. As for the year 2020, the standard mileage rate for a certain business is $0.575 per mile. Hence if you have travelled 100 miles per week for business, then by the end of the year you are eligible for a deduction of $2990 on your taxes. In case you need to be precise when it comes to tracking business mileage then there are available various business expense tracker apps that are designed to automatically calculate the mileage for you.

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One has to bear in mind that not every business is eligible for a tax refund. Nevertheless, a small business owner that does not qualify for a business tax refund can still acquire money back for their tax returns. Likewise, there are also certain steps that one can take to increase the amount of money one gets back on the return such as the prepayment of the expenses and to be able to maintain track of the tax credits that you are eligible for.

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Frequently Asked Questions (FAQs)

Do businesses have Income Tax returns?

It has to be kept in mind that the tax file return is essential for all the qualified businesses that operate under the Income-tax Act 1961/Income-Tax Rules, 1962.

Who is required to Pay the Income-Tax?

Well, the income tax needs to be paid by every eligible person out there. Here the term person is inclusive of all the eligible candidates as defined under the Income-tax Act under section 2(3) covers in its ambit natural as well as artificial persons.

What is the Minimum Salary to be able to pay the Income Tax?

As per the income tax laws the filing of income tax returns is compulsory for individuals who have a total income during the financial year to exceed the basic exemption limit of more than the gross total of INR 250000 under the previous regime and INR 300000 under the new regime.

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