When it’s time to file taxes, small business owners have a lot to consider. Among the most critical questions to ask yourself is whether you qualify for a tax refund. Understanding how income taxes function is a fundamental aspect of business, and this knowledge can be especially valuable for those who are new to entrepreneurship.
To that end, here are some key facts about taxes that small business owners should keep in mind. This information includes whether a small business can receive a tax refund, an essential question that often arises during tax season.
What is considered a small business?
There are two ways to qualify as a small business. You can either have less than $5 million in gross receipts or less than $25 million in assets. If you have less than $5 million in gross receipts, you will be considered a small business if your average annual gross receipts for the three prior tax years is less than $5 million and if you have less than $25 million in assets at the close of the income tax year.
If your business has both gross receipts and assets that exceed these thresholds, then you won’t qualify for this tax break.
Is it possible to receive a tax refund for business taxes?
As a small business owner, you might be wondering whether you’re eligible for a business tax refund. The answer is yes, you can receive an income tax refund as a small business owner. However, there are important factors to consider regarding how your business is taxed and the kind of refund you can anticipate.
It’s essential to understand that a small business does not necessarily mean a sole proprietorship or partnership, but in most cases, it refers to a corporation owned by shareholders who pay taxes on their portion of profits at personal income tax rates.
In simpler terms, if you own a corporation and earn money from it, you will need to pay corporate taxes on those profits before receiving them as dividends or salary. If the after-tax profits are significant enough, there may be surplus money available for shareholders at the end of the year when filing a corporate tax return (Form 1120) to be distributed as dividends or salary, or both.
In this case, any shareholder who receives cash distributions from the corporation must pay taxes on those distributions at their marginal personal income tax rate, just like any other salary or dividend payment from a company.
Tax Credit Programs For Small Businesses
There are several tax credit programs available for small businesses, making it one of the easiest ways to reduce tax liability. These programs cater to the needs of small businesses and can offer significant benefits when it comes to lowering your overall tax bill.
The Small Business Jobs Act (SBJA), passed in 2010, aimed to stimulate job growth in small businesses nationwide. It offered a range of tax credits to companies that could hire new employees or increase wages for existing staff.
Here are some common tax credit programs available to small businesses:
Startup Tax Credits: This program assists small businesses in their initial stages by offsetting the costs related to starting up the business, as long as the annual revenue is less than $50,000.
Health Care Tax Credit Program: Small businesses can deduct up to 50% of their health care premiums through this program. If more than 40% of the total compensation goes towards health insurance premiums, this credit could save hundreds of dollars on taxes each year.
Work Opportunity Tax Credit: This program provides a tax credit for hiring people from particular target groups who face significant employment barriers. Over the years, WOTC has helped many veterans, ex-felons, disadvantaged youth, and others find jobs and start new careers.
Small Business Income Tax Calculator
To assist small businesses in determining whether they will receive a tax refund or owe money to the IRS, the IRS offers a straightforward online calculator. This tool can provide insight into the tax implications of your business and is completely free.
If you’re unsure about how to use the calculator, here are some helpful tips:
The initial step is to input your personal information, such as your filing status and income. Afterward, you will enter the total amount of all your business income from all sources during the year. This includes revenue from sales of products or services, as well as other types of income such as interest and dividends.
You will also need to add any expenses that were incurred during the year regarding your business operations. These expenses may include advertising costs, employee salaries, office supplies, and legal fees. The IRS website has a helpful list of common deductions that many small businesses use when filing their taxes each year. It’s essential to remember that not all expenses will apply to every business.
After entering all this information into the calculator and clicking “submit,” it will provide an estimate of your refund or balance due based on current tax rates.
Deductions for Small Businesses
Small business owners have various options to reduce their taxable income and save money on taxes. Tax deductions can play a significant role in achieving these objectives.
Here are some examples of common tax deductions available to small businesses:
- Deduction for home office use (if you run your business from home)
- Supplies and equipment used in business operations (e.g., computers, printers, and fax machines)
- Travel and entertainment expenses incurred while conducting business-related activities
- Business-related meal expenses
- Payroll taxes (seek advice from an accountant for further details)
- Health insurance premiums paid by an employee who is also a company owner/partner
Numerous deductions are available to small businesses; the key is to identify which ones are applicable to your business and how to claim them.
Tax Refunds For Small Businesses FAQ’s
Small business owners may be surprised to learn that they are eligible for tax refunds. It’s a great way to boost cash flow, but the process can be complex. Below are some frequently asked questions regarding small business tax refunds:
Will I get a tax refund if my business loses money?
Generally, if your business made less money than it did the previous year, it’s unlikely that you’ll receive a tax refund. However, some exceptions may apply, such as having personal income from another source that could offset business losses.
How much do small business owners get back in taxes?
The amount depends on various factors such as the business entity type, location, and the remaining money after expenses are paid. Additionally, several other factors can affect the bottom line of small business owners, such as deductions for charitable donations and employee benefits, job creation credits, interest-free loans, and more.
Can a sole proprietor get a tax refund?
Yes, a sole proprietor can receive a tax refund, provided they meet specific criteria, including having filed all required taxes by the deadline, having paid taxes on the business’s earnings and expenses throughout the year, and their total taxable income exceeding total deductions.
Will I get a tax refund in the first year?
For sole proprietorships, partnerships, and limited liability companies, a tax refund in the first year is possible. However, S corporations and C corporations probably won’t receive a refund in the first year because they must pay taxes on profits before distribution to shareholders.
Can I get a tax refund if I’m self-employed?
Yes, self-employed small business owners can get a tax refund. Filing Schedule C with Form 1040 helps the government determine how much money to withhold from paychecks throughout the year, and it can be used to claim deductions and credits that may reduce taxable income.
Small business owners should explore all possible tax deductions and credits to maximize their refund potential. With careful planning and attention to detail, even small businesses can benefit from tax refunds and reduce their overall tax burden. By consulting with a tax professional and staying up-to-date with the latest tax laws and regulations, small business owners can make the most of their financial resources and keep their businesses thriving.