As a small business owner, you might have a big question come tax time: Can a small business get a tax refund? The answer at first seems simple: Yes, a small business can get a tax refund. A more accurate – and complicated – answer might be that there’s a huge gap between a company receiving a tax refund and a small business filing taxes to increase your chances.
A short introduction to tax refunds
Individual taxpayers receive tax refunds when they pay more taxes throughout the year than the amount calculated to be due on their annual tax return. The same logic applies to a small business: A company that has paid more than the amount indicated on an annual return can get a tax refund. But again, a small business filing taxes will find that earning a refund is far easier said than done.
What is the small business tax rate?
A fundamental tenet of tax preparation for small businesses is that no two companies will pay the exact same small business tax rate. According to the U.S. Small Business Administration, the average small business tax rate is 19.8 percent. The average tax rate also varies by small business tax classification:
- Sole proprietorship: 13.3 percent
- Partnership: 23.6 percent
- S corporation: 26.9 percent
- C corporation: 17.5 percent
Six tips for reducing your small business’s taxable income
As you may have inferred from how small business tax rates vary by tax classification, you can make certain changes to how you go about tax preparation for your small business to increase your chances of getting a refund. Here are the seven steps you should follow.
1. Choose your business entity type
As a small business owner, you can choose the structure of your business. Your choice will affect your small business taxes and help to determine whether your small business can get a tax refund.
Some small businesses may have pass-through entities set up, so income goes to the owners. In these situations, small businesses would not pay taxes, but the owners themselves pay taxes on the income they earn. Therefore, businesses structured as an LLC, sole proprietorship, S corporation, or partnership are not eligible for tax returns. This means that only a C corporation can receive tax refunds. If you want to change your small business structure, you can file IRS Form 8832 to change how your business should be classified for federal tax purposes.
2. Look at the tax categories you pay
When filing business taxes, you’ll pay some combination of payroll taxes, income taxes, and other taxes required by the state you operate in. You may be able to use these tax categories to inform your tax refund strategy:
- Payroll taxes: Your business must withhold payroll taxes such as Social Security and Medicare from employees whom you pay based on a W-2 form. If the amount you withhold for payroll taxes and ultimately pay to the IRS exceeds what your annual tax return shows you owe, you will receive a tax refund.
- Income taxes: If your company is taxed as a C-corporation, you could be eligible for a tax refund based on your income tax payments. If the taxes levied on your C-corporation throughout the year exceed the amount indicated on your annual return, you are eligible for a tax refund.
3. Hire a tax professional
When it comes to knowing how to file taxes for business, a tax professional such as an accountant or bookkeeper can do much of the work for you. These professionals can also review your business tax returns and figure out your refund eligibility much more quickly than you might be able to do alone. Just as individual taxpayers often entrust their tax preparation to accountants, your business could benefit from doing the same.
4. Utilize tax preparation software
Let’s say you’re faced with the daunting prospect of putting together a business tax return, and you want to inquire about a tax refund. If an accountant isn’t in your budget or you prefer to take the DIY route, you can use tax preparation software tools to fulfill your tax obligations. With tax software, you’re essentially doing your taxes yourself, but your program can help guide you and point you toward some deductions and other tricks to help you minimize your taxable income. Some programs may offer live support from CPAs on staff, too.
5. Research business deductions to try and reduce your taxable income
Several common business deductions can help you reduce your taxable income as well. Many of these deductions pertain to your business’s tax classification and elections, but others pertain to equipment purchases, retirement plan contributions, and dozens more categories. Learn more from this SmartBiz Loans blog post: 5 Small Business Tax Deductions.
6. Look in unexpected places to find more deductions
Other ways to potentially help reduce your taxable income might include:
- Review your personal credit card and bank statements. If you spot a business transaction on a personal account, make sure to log this transaction among your business expenses instead. That one missed transaction could be a business deduction you may have missed otherwise.
- Offer more employee incentives. Gifts and other awards may also be tax-deductible, though most cash bonuses are not. The IRS explains when these incentives and other fringe benefits are tax-deductible; consult the IRS or a tax professional before making a decision.
- Explore tax credits. A tax credit is an amount of money that you can subtract from your tax debt before paying it. Unlike a tax deduction, a tax credit is subtracted from the taxes you owe instead of your taxable income. On a federal and state level, no shortage of tax credits is available to your small business. Your accountant or other tax professional may be aware of tax credits you might not have otherwise known about.
So, will my small business get a refund?
It’s hard to know in advance whether your small business will get a tax refund, but what can be said is that you can take steps to increase your chances. Your choice of tax classification, as well as your current incorporation, may also impact the tax credits available to you. As you start preparing your tax returns, be sure to consult your tax professional or use tax software that can help you maximize these deductions and increase your chances of receiving a refund, if your business is a C corporation.
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