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Can a Small Business Get a Tax Refund?

Small businesses might wonder if their business is entitled to a tax refund. Taxpayers, in general, receive a refund only when they paid more taxes than was actually due on their return.
So, how does a business know if they are due a refund?

There are a few factors to consider:

The Type Of Business Entity

When you started your business, you should have decided what of business entity to form, which would have determined the way your business was taxed by the IRS and state.

A lot of small businesses decide to become  entities that allow income to be passed through the owners. They are then taxed on their individual tax returns. These types of entities pass taxable income to the owner, so they don’t pay the tax directly to the IRS and would therefore never receive an income tax refund.

The entities that pass their income through to their owners are:

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.

Owners of businesses who report income from pass-through companies include the income from the business along with income from other sources like wages, interest and dividends, gains on the sale of property or rental income on their individual Form 1040. If these individual owners’ payments and withholding exceed their total tax liability on the return, they would receive a tax refund.

The only type of small business entity that pays income tax directly through the business is C corporations – using Form 1120. The only way a C corporation would get an income tax refund if is it paid more estimated tax during that what is due on their return.

Type of Taxes They Pay

The type of taxes you pay can determine if there is a tax refund for your business.
Here are some situations where a business might receive a refund:

Income Taxes: As discussed above, the only business entity that would receive a refund of income tax is a C corporation. Owners, partners or shareholders would receive a refund on their personal return based on their total income.

Payroll Taxes: You might receive a refund, regardless of your entity type, if your business withholds and pays payroll taxes and you overpaid. Restaurants might also receive a tip credit – a tax credit that can be used to reduce the income tax owed by the employer – which could result in a refund.

Sales or Excise Taxes: Most companies are subject to sales or excise taxes, which typically are assessed by states or municipalities. Sometimes, either an overpayment or these taxes or reassessment of the property value can result in a refund to a business.

Basically, if you’ve paid in more than your actual tax liability, you will be owed a refund. Keep in mind though how complicated business taxes can be.

If you are unsure about how your business is being taxed and whether you should be getting a refund, contact an experienced tax preparer.

This article will also discuss:

Can an LLC Get a Tax Refund?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

Can an LLC Get a Tax Refund?

The IRS treats LLC like a sole proprietorship or a partnership, depending on the number if members in your LLC. This means the LLC does not pay taxes and does not have to file a return with the IRS. If you’re the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return.


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