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Can A Small Business Get A Tax Refund? (Solved)

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Can a Small Business Get a Tax Refund?

Have you ever wondered how to get a tax refund for small business ventures? In theory, it’s actually simple — if you overpaid on your tax return, then you’ll get a refund from the IRS.

In practice, however, it’s not as clear cut because businesses and individuals are taxed differently. There are rules that determine whether your company is eligible for refunds or not, and unfortunately, these guidelines aren’t always easy for business owners to understand.

So, can a small business get a tax refund? Yes, but here are some of the specifics you need to know.

The Type of Business Entity Matters

When discussing can a small business get a tax refund, the first thing you should look at is the business entity type, or how the business is structured. This is important because it dictates how the IRS taxes your company, and who gets a tax refund. 

For example, most types of business entities, like sole proprietorships and S corporations, are considered pass-through companies. These organizations don’t file a business tax return, but instead pass taxable income through to their owners or incorporators.  It’s then up to the owners to declare the business’s income (on top of their other income sources like salaries and dividends) when filing their personal tax returns. 

Now, you might be wondering, can a business owner get a tax refund? The answer is yes, if their withholding payments exceed the total liability from their business and other declared income sources.

With that in mind, when do businesses get tax refunds? This only happens when the business entity is a C corporation, which is taxed separately from its owners. C corporations also have the advantage of lower tax rates compared to the average tax return for small business owners.

The Types of Taxes Businesses Need to Pay

Businesses pay other types of taxes in addition to income tax. This is important because some taxes are eligible for refunds (if you overpaid, of course) regardless of your business entity type.

One example is payroll tax, which is the amount you withheld from your employees’ wages to pay their income taxes on their behalf. If you overpaid these, you’d automatically get a tax refund, regardless of whether you’re a sole proprietorship or a C corporation.

Another example is sales tax, or excise taxes in some industries. Scenarios that warrant a refund from these taxes include overpayment or a reduction in liability due to a reassessment of your property’s value. Restaurants also often get a tip credit, which helps lower the owner’s income tax. If any of these scenarios occur after you’ve paid your taxes to the IRS, you’ll get a refund.

Can an LLC Get a Tax Refund?

An LLC is a special type of business entity that combines aspects of a partnership and a C corporation. Its most important feature is that the owners are not personally liable for any of the company’s debts. As a unique business entity, one would naturally ask how it’s taxed, and whether it’s eligible for an LLC tax refund.

LLC companies function similar to pass-through companies such as sole proprietorships or partnerships, so the IRS taxes them in the same way. Hence, the responsibility to file taxes falls on the owners, and the LLC doesn’t pay any taxes nor receive any tax refunds on its own.

How to Reduce Taxable Income and Maximize Your Refund

Many company owners get fixated on tax refunds. In fact, you may be one of the many owners asking questions like “how can a business receive a tax refund?” But the truth is that getting tax refunds isn’t necessarily a good thing. That’s because it represents idle money with the IRS that isn’t earning any interest or being used to grow your business. 

You should instead focus on reducing your total tax liability. That way, you end up paying fewer taxes and free up more money for more productive uses. The chief way you do this is by claiming legitimate business expenses as deductions to lower your business’s taxable income. 

You can use almost every business expense (within reason) as a deduction. Overhead like rent, utilities and payroll are all legitimate deductions, as well as marketing expenses like advertising spend. Even business trip expenses like airfare and accommodations are legal deductions if properly declared.

Smaller businesses like sole proprietorships have an even larger advantage. Some personal expenses like using the owner’s house as an office or retirement plan contributions can help further reduce tax liability.

Expecting a Large Refund? That Could be a Problem

Waiting for a large refund from the IRS means that your money is tied up while accruing no interest, and that might be hurting your cash flow more than you think. 

If that’s the case, you need access to flexible, reliable funding from a third-party company like L3 Funding. We provide a wide variety of merchant funding solutions that can help you bridge your cash flow needs in lean times. Contact us today to learn more.