Can a Small Business Get a Tax Refund?

A common question that tax practitioners often hear from our small business clients is “Why doesn’t my business get a tax refund?” Taxpayers, in general, receive a refund only when they have paid in more tax than was actually due on their return.

So, how do you know if your business is due a refund? There are a few factors you need to look at.

It Depends on Your Entity Type 

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, they don’t pay tax directly to the IRS and therefore would never receive an income tax refund.  

Types of entities that pass their income through to their owners include:

• Sole proprietorship: Single-owner business that reports their income and expenses on the owner’s individual tax return (Form 1040), using a Form Schedule C.
• Partnership: An unincorporated business with two or more owners; files a Form 1065 and issues Forms K-1 to the partners, who include the income and pay tax on their individual returns.
• S corporations: A corporation that has elected to pass the taxable income from the business through to their shareholders. The S corp files a Form 1120S and issues a Form K-1 to each shareholder, who then reports the income and pays tax on their individual returns.

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.

C corporations are the only small business entity type that pays income tax directly to the taxing authorities (using Form 1120). 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.

It Also Depends on the Type of Tax

The type of taxes you pay could result in a tax refund for your business. Let’s take a look at some situations where a business could potentially receive a refund.

Income taxes: C corporations are the only business entity that would receive a refund of income tax as discussed above. The owners, partners, or shareholders would receive a refund on their personal returns based on their total income.

Payroll taxes: Regardless of entity type, if your business withholds and pays payroll taxes, you might receive a refund if your account is overpaid. Some restaurants may also receive a tip credit, which is a tax credit that an employer can claim to recover FICA taxes paid on tips received by employees. The tip credit can be used to reduce the income tax owed by the employer, which could result in a refund.

Sales or excise taxes: Most businesses are subject to sales and/or excise taxes, which are typically assessed by states or municipalities. In some cases, either an overpayment of these taxes or reassessment of the property value could result in a refund to your business.

Generally speaking, if you’ve paid in 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.

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