Small Business Tips and Tools

Do Small Businesses Get Tax Refunds?

What solopreneurs and other small business owners need to know about receiving a small business tax refund this tax season.

April 5, 2022 · 5 min read

The average 2021 tax refund rang in just shy of $3,000, so it’s only natural you’d want to know how you (and by extension your small business) can get your hands on a refund this tax season. But let’s face it: Business taxes are complicated. You might be wondering, do small businesses get tax refunds the same way individuals do?

Can my small business get a tax refund?

In general, small business tax refunds aren’t as common as they are for individual taxpayers.

You’re probably familiar with receiving a refund on your personal tax returns — you get one if you’ve paid more taxes than are due. The same is sort of true for businesses, except not all entities are eligible for a business tax refund. nly C-Corps pay income tax directly to the IRS, rather than passing the income through to their owners, so only C-Corps are eligible.  The majority of small businesses don’t receive tax funds.

But small business owners do. If you make estimated tax payments and overpay, you could receive a tax refund in April.

Need help determining if your business qualifies for a tax refund? Working with a trusted, reputable tax preparer is the safest way to prepare and file your taxes and reduce your tax burden. Let the professionals focus on identifying your tax deductions, tax credits, and liabilities — and finding you the biggest tax breaks! — while you do what you do best: focus on your running your business.

However, with that said, we’ll explain the basic influencing factors on tax refunds for small businesses below.

How your small business entity type factors into tax refunds

The smaller your business, the more likely your income is to flow through to your personal return, Form 1040, where you report it as income (along with your wages, interest and dividends, gains of property sales/rental income and all that good stuff) and pay tax on it or (if eligible!) potentially get a refund.

In fact,  95% of American businesses operate as pass-through entities. Does your income “pass through” to you as an individual to be reported on your personal tax return? Do you file a Schedule C? Operate a partnership or an LLC or take the S-Corp election for tax purposes? That means your entity is a pass-through and cannot receive a tax refund.

Here’s a more detailed look at types of businesses and whether they qualify for a tax refund:

Sole proprietorship

  • Does not qualify for a tax refund
  • Solopreneurs report profit & loss on a Schedule C attached to Form 1040 and could get a refund

Partnership

  • Does not qualify for a tax refund
  • Files Form 1065 and issues a Schedule K-1 to each partner
  • Partners taxed on share of business net income; could receive a refund

LLC

  • Does not qualify for tax refund
  • Single-owner files Schedule C and could get a refund
  • Multiple-owners issued Schedule K-1 (multi-member LLC also files Form 1065) to be taxed on share of business net income; could receive a refund

S-Corporation

  • Does not qualify for a tax refund
  • Files Form 1120S and issues Schedule K-1 to owners
  • Owners/shareholders taxed on share of business net income; could receive a refund

C-Corporation

  • Only entity eligible for tax refund
  • Files Form 1120 and pays federal taxes based on net earnings — can receive refund if it overpaid quarterly taxes

Learn more about filing according to your business structure in the Understand Your Tax Obligations guide.

How do the types of taxes I pay factor into a refund?

Again, if you overpay your estimated tax payments for your small business, you could get a tax refund.

Still, these are a few areas where a small business could get a refund:

Payroll

If you have employees, you must withhold and pay payroll taxes on their salaries and wages. Situations where you may get a refund:

  • overpayment
  • tax credits like the R&D Credit or the Employee Retention Credit

Not sure what these last two are? We offer guides to help Claim the R&D Tax Credit and Claim the Employee Retention Credit.

Income

Only a C-Corp pays income tax directly to the IRS, so only a C-Corp could potentially get a business tax refund by overpaying what it owes.  (If you overpay your business taxes you can still get a tax refund on your personal return)

Sales or excise taxes

Most likely you pay sales tax to your state or municipality — head to the Learn About Sales Tax guide for more insight. Reasons you might qualify for a refund include:

  •  overpayment
  • reassessment of property value

What’s the average tax refund for a small business?

Again, it’s not common for a small business to get a tax refund.  But research by Clutch suggests that 30% of small business owners believe they overpay their taxes and that they could stand to claim more tax deductions and credits. Hiring a tax professional is the best way to identify your tax breaks and  lower your tax bill.

How can I optimize my tax refund?

Getting a big refund might not be possible as a small business owner. But reducing your tax burden in any way you can is necessary to ensure your growth. Anyways, nobody wants to overpay estimated taxes and lose the capital they have on hand to pay the bills!

Five ways you can optimize for taxes are to:

  • Find a CPA who knows your business, industry, local tax laws, and financial goals using the AICPA Directory
  • Head to the Know Your Common Business Deductions guide to brush up on write-offs for home office, retirement, travel and more
  • Talk to your tax preparer about income-related tax breaks like the Qualified Business Interest deduction or the Earned Income Tax Credit
  • Talk to your tax preparer about Tax Credits, but never try to pigeonhole yourself into qualifying for one
  • Learn to Track your Business Finances like a pro to navigate small business taxes even easier

Anything else should I keep in mind about tax refunds for small business?

Here are a few other final tips that you may want to keep in mind for small business taxes:

Remember, work with a tax professional you trust to handle your taxes.  This will allow you to get the best tax breaks and spend more time growing your business instead of fussing over complex IRS paperwork. You’ve got this!

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