Yes, businesses get tax refunds. And we can break down business tax refunds into two types:
- Tax Refunds for Overpayment: These refunds apply to individual income tax returns for members of a multi-member LLC, partnership, or other pass-through entity.
- Tax Credits: Tax credits lower your tax bill “dollar for dollar,” which is different from a tax deduction.
Let’s get into the specifics.
Tax Refunds For Members of Pass-Through Entities
Most businesses incorporated in the United States are “pass-through entities,” including sole proprietorships, partnerships, limited liability companies (LLCs), and S-corporations.
Unlike C-corporations, which pay federal income taxes at the corporate level, a pass-through entity’s profits “pass through” to the owner or owners, and the owners pay taxes rather than the business.
You can receive a tax refund if you own a pass-through business and your estimated tax payments and tax withholding exceed the taxes due on your return.
Here’s a scenario where two members of an LLC receive a tax refund:
In 2019 and 2020, each member of the LLC makes $200,000/year. Because their estimated tax payments for 2020 are based on 2019’s income, there’s no reason for the IRS to issue a refund.
The following year, in 2021, the business performs poorly. Both members agree to reduce their monthly disbursements, and each makes $150,000/year.
Even though both members make less money throughout 2021, they pay estimated quarterly tax payments based on their 2020 income of $200,000/year.
For 2021, both members have overpaid and will receive a refund from the IRS. So do businesses get tax refunds? Yes. And those refunds pass through to the owners, with one exception.
Tax Refunds for C-Corporations
Only C-corporations pay income taxes directly, so C-corporations are the only businesses that receive refunds that do not pass through to individuals. But similar to an LLC or other pass-through entity, a C-corporation gets an income tax refund if it pays more in estimated taxes than it owes.
What are tax credits?
Tax credits lower your tax burden dollar for dollar, which means that dollar value of a tax credit is subtracted from what dollars you owe in taxes. Again, do businesses get tax refunds? Yes. If your business qualifies for enough tax credits, it’s possible to receive a refund larger than the amount of taxes your business pays throughout the year.
Most small businesses will not qualify for enough tax credits to receive a refund based on tax credits alone, but it’s fair to characterize credits as contributors to a refund. For example, if you receive a refund due to overpayment—as we discussed above—tax credits would add to that refund.
Healthcare-related expenses yield lucrative tax credits
The Affordable Care Act created the Tax Credit for Small-Business Health Insurance Premiums. Qualifying businesses must have fewer than 25 employees, pay an average annual salary of $55,000, cover at least half of employee health insurance premiums, and purchase their plan through the Small-Business Health Options Program. Businesses can claim this credit for two consecutive years to get a tax credit worth 50% of their premiums.
Providing childcare and leave for medical and family issues comes with a generous tax credit
The Employer Credit for Paid Family and Medical Leave is available for companies that offer at least two weeks of paid family and medical leave.
A business must pay 100% of its employees’ salaries during leave to get 25% of the wages back in tax credits. But even if a business pays just 50% of its employee’s salaries, it still qualifies for 12.5% of that amount in the form of a tax credit.
A similar credit is the Employer-Provided Childcare Facilities and Services. It’s a credit for businesses that cover the cost of childcare or provide childcare facilities to employees. This tax credit is 25% of the total expenditure—up to $150,000 per tax year.
Hiring from certain demographics qualifies businesses for tax credits
A business can claim a Work Opportunity Tax Credit if they employ veterans, ex-felons, residents of federal empowerment zones, or recipients of SSI, family assistance, or food stamps. The exact size of this tax credit depends on the demographic information of the employees in question and how many hours they work. However, generally speaking, it will be at least 40% of the first $6,000 in wages, equating to at least $2,400 per employee.
Don’t forget about R&D tax credits
Businesses can leverage the Credit for Increasing Research Activities if they engage in research or product development. Contrary to what you might think, your business does not have to be involved in medicine or science.
Developing a new product or model, creating a new manufacturing or business process, improving the efficiency and quality control of an existing process, and obtaining environmental testing are all activities that can reduce your tax burden by 10% of their total cost.
Green energy tax credits incentive the use electric vehicles for business purposes
If your business produces or utilizes alternative energy in any way, you can claim one (or more) of the various electric vehicle and alternative fuel credits. The size of these tax credits will depend on what IRS form you fill out.
For example, the Biofuel Producer Credit only applies to businesses that are in the production of biofuel. But a common tax credit in this category is the Qualified Electric Vehicle Credit. This tax credit varies according to your vehicle’s make, model, and battery capacity but generally ranges between $2,500 and $7,500 per vehicle.
If you’re in the hospitality industry, you can save with payroll tax credits
Business owners in the hospitality industry—such as restaurant and bar owners—will find the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips particularly relevant.
If you have paid payroll taxes on tips received by employees, you can receive that dollar amount back as a credit, provided you pay your employees at least the federal minimum wage.
Businesses in low-income income areas qualify for real estate credits
Businesses can leverage the New Markets Credit to lower their tax burden. To qualify for the credit, businesses must hold property within a census tract with a 20% poverty rate or higher or have a median household income that does not exceed 80% of the area’s median household income.
Examples of activities that qualify for this tax credit include:
- residential fix and flips; and
- construction or renovation of facilities classified as educational, recreational, healthcare-related, industrial; and, rehabilitative, i.e., “rehab” clinics assisting underserved communities.
These refunds are meant to incentive investment in low-income communities. If your business already operates in a low-income area, you may qualify.
Want a larger refund? You’ll need a team.
Can businesses get a tax refund? Yes, but the size of a tax refund corresponds to the effort and expertise dedicated to maximizing tax credits and other strategies. If you feel like your business has not been taking advantage of tax refunds to the fullest extent, schedule a discovery with me. We’ll get started.
– Jeremy A. Johnson, CPA