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 scenariosContinue reading