Do businesses get tax refunds? Sometimes. Generally, taxpayers, whether individuals or businesses, will only get a refund if they pay more in taxes during the year than they end up owing. Tax refunds for small businesses tend to be less common than refunds for individuals simply because they often do not pay taxes directly.
Whether or not your business can get a tax refund will depend on how it is structured and how much you paid in estimated taxes during the course of the year. Here’s a closer look at how a business can get a tax refund.
How Do Tax Refunds Work?
Taxpayers can generally receive a tax refund if too much money was withheld from their paychecks throughout the year. Because business owners typically don’t have any taxes withheld on their business income, they will often pay their federal and state taxes on a quarterly basis. These payments, called estimated taxes, are based on how much the owner thinks the business will owe in taxes. If the estimate is too high, they will get a refund.
However, whether that refund goes to the business owner or to the business itself will depend on the way the business is structured. Generally, C-corporations are the only type of business entity eligible for a direct tax refund.
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Are Businesses Eligible for Tax Refunds?
In some cases, yes. A small business that is registered as a corporation may be eligible for a tax refund if it overpaid on its quarterly estimated taxes. Any amount of overpayment would be refunded to the business after its tax filing.
Most small businesses, including sole proprietors, LLCs, partnerships, and S-corporations, however, pay their business income tax through the owners’ personal tax return. These are called pass-through businesses because their profits “pass-through” to the owners’ personal tax return, and the business owner or owners pay taxes rather than the business.
Business owners who report income from pass-through companies include the income (along with income from other sources, like wages, interest and dividends, gains on the sale of property or rental income) on their individual 1040s. These individual owners would receive a refund only if their total payments and withholding exceed their total tax liability on the return.
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Pros and Cons of Overpaying Taxes to Get a Refund
The key to getting a tax refund on your business’s income is to pay more in taxes throughout the year than you end up owing at the end of the year. This is the case whether you own a pass-through business (and report your business’s earnings on your personal tax return) or a corporation. Here’s a look at the advantages and disadvantages of overpaying taxes to get a refund.
Pros
• Avoid fines from the Internal Revenue Service (IRS) from paying too little
• Reduced cash flow prevents the business from overspending
• Refund can be put into a savings account for next year’s quarterly taxes or used to pay off debt
Cons
• Can take time to receive a refund
• Reduces your business’s cash flow and spending potential
• Can make a company’s financials seem worse than they are, which might make receiving a business loan more difficult.
Types of Businesses
Whether your business can get a tax refund or not will depend on how it is structured. There are five types of business structures, each with its own tax requirements.
Sole Proprietorship
A sole proprietor is a person who runs an unincorporated business by themselves.
Because a sole proprietorship is not a distinct legal entity from the sole proprietor, the business does not file a business tax return. Any money earned or lost is reported on the business owner’s personal tax return using Form Schedule C.
Limited Liability Company (LLC)
A limited liability company (or LLC), is essentially a legal hybrid between a sole proprietorship and a corporation. The benefit of an LLC is that the business owner is protected from any personal responsibility associated with the business’s debts (such as different types of small business loans).
LLC owners typically report income from their business (along with income from other sources) on their individual 1040s. These individual owners would receive a refund only if their total payments and withholding exceed their total tax liability on the return.
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S-corporation
S-corporations pass their income through to their owners (called shareholders), so the business itself doesn’t pay any corporate tax. Each owner reports this income on a Schedule K-1 when they file their personal tax returns and pays taxes on their share of the business’s profits.
Partnership
Partnerships file Form 1065 to report the company’s revenues and expenses. However, the partnership doesn’t pay taxes to the government directly. Each partner receives a Schedule K-1 that reports their share of the business’s profits. They then use this K-1 to fill out their personal tax returns and pay any tax due on that income.
C-corporation
A business structured as a C-corporation is taxed separately from the business owners. C-corporations use Form 1120 when filing their taxes. A C-corporation is a type of business that could get a tax refund in the event that it pays more estimated tax during the year that is due on the final tax return.
Types of Business Taxes
Whether your business or you as the owner can get a tax refund also depends on the type of taxes you pay. Here’s a closer look at how and when you might get a refund.
Income Tax
Businesses or business owners typically have to pay federal, and often state, income tax on any profits earned in a given year. They typically do so by paying quarterly estimated tax payments. If the owner or business overestimated and overpaid, it may receive a refund.
Payroll Tax
If your business has employees, you must report and deposit both federal and state payroll taxes, which include unemployment taxes, FICA taxes, and income tax withholding. Regardless of your business structure, it might be possible to receive a refund on payroll taxes if you overpay your account.
Self-Employment Taxes
Self-employment taxes go towards both Medicare and Social Security. All LLC members, sole proprietors, and partners in a partnership must pay self-employment taxes. An overpayment of these taxes could result in a refund to the business owner.
Sales Tax
Many states and cities levy a sales tax on transactions of goods and services. The federal government also taxes certain goods and services, such as tobacco or fuel. An overpayment of sales or excise taxes could result in a refund to the business or owner.
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5 Tips to Maximize Business Tax Refunds
One way to maximize business tax refunds is to deliberately overpay estimated taxes, which, as mentioned above, has both pros and cons. Here are some other ideas to keep in mind when planning your business’s finances.
1. 401(k) Matching
If you offer your employees a 401(k), you may want to consider also offering matching funds. The amount your company offers in a 401(k) match is typically considered a qualified business expense up to certain limits.
2. Tax Credits
As a business owner, there are a number of tax credits you may be able to take advantage of at both the federal and state level. Speak with your account or take a look at the IRS’s business tax credits to see what credits you may be eligible for.
3. Tracking Mileage
If you drive for business, it can be a good idea to track the amount of business miles you’re logging throughout the year. The IRS allows you to deduct a certain amount for every mile driven for business purposes (for the 2023 tax year, it will be 65.5 cents per mile).
4. Home Office Deductions
If you have an office in your home dedicated solely to your business, you may be eligible for a home office deduction. Generally, your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.
Home office business deductions are based on either the percentage of your home used for the business or a simplified square footage calculation.
5. Employee Bonuses
Bonuses can be a win-win. They not only help incentive and reward employees, they may also qualify as a small business tax deduction. There are rules and regulations around how much of a tax deduction you can take from employee bonuses. To learn more, refer to the IRS’s Guide to Fringe Benefits.
The Takeaway
A business can get a tax refund if it overpays its estimated taxes. However, whether that refund goes to the business itself or to you, as the business owner. will depend on how your business is structured. Generally, the only way the business itself will get a tax refund is if it’s structured as a C-corporation.
Whatever your business structure, however, there are actions you can take throughout the year that could potentially reduce your tax burden and, subsequently, increase your tax refund. A tax professional can offer guidance.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Can small businesses get money back on their taxes?
It’s possible. However, in order for a small business to get a tax refund, it would need to pay more than is actually owed to the internal revenue service (IRS) in estimated taxes. And, unless the business is structured as a C-corporation, any refund would go to the business owners, not to the business itself.
How much can small businesses get back in taxes?
It all depends on how much the business paid in estimated taxes. If the business (in the case of a C-corporation) or the business owners (in the case of a pass-through business) overpaid estimated taxes during the year, that business or owner would get a refund.
Are LLCs able to get tax refunds?
Not typically. LLCs are generally treated as pass-through entities for federal income tax purposes. This means the LLC doesn’t pay taxes or get refunds of its own. Instead, each member pays taxes on the business’s income in proportion to their ownership stake in the LLC. If the LLC members overpay their estimated taxes, they would receive a tax refund.
Photo credit: iStock/Jirapong Manustrong
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