Can You Get a Refund on Business Taxes?

While businesses focus on calculating and remitting taxes, various situations can lead to an overpayment to the Internal Revenue Service (IRS). This can happen when initial profit estimates are too high or when a business discovers eligibility for new tax benefits after filing a return. This guide provides a look at when and how a business might receive a tax refund from the federal government.

Common Reasons for a Business Tax Refund

A primary reason businesses receive tax refunds is the overpayment of estimated taxes. Companies are required to pay taxes on their income in quarterly installments throughout the year. These payments are based on a projection of the year’s total income and expenses. If a business’s actual profit is lower than anticipated, the total of its quarterly payments can exceed its final tax liability, resulting in a refund. This scenario is common for businesses with fluctuating income or for those who make conservative payments to avoid underpayment penalties.

Refundable tax credits are another source of business tax refunds. Unlike deductions, which lower taxable income, credits provide a dollar-for-dollar reduction of the tax owed. While most credits are non-refundable and can only reduce tax liability to zero, certain credits are refundable, meaning a business can receive the remaining credit amount as a payment even if it has no tax liability. An example is the Credit for Small Employer Health Insurance Premiums.

A Net Operating Loss (NOL) can also generate a tax refund. An NOL occurs when a company’s allowable tax deductions are greater than its taxable income for the year. Under current tax law, NOLs arising in tax years after 2020 cannot be carried back to prior years. However, these losses can be carried forward indefinitely to offset up to 80% of taxable income in future years, reducing future tax payments.

Information and Documentation Needed to Support a Refund Claim

To substantiate a claim for a tax refund, a business must maintain meticulous records. If a refund claim relates to a prior tax year, having a complete copy of the originally filed tax return is needed for preparing the corrected version. The foundation of any claim rests on providing:

• Accurate financial statements, including the income statement and the balance sheet for the tax period in question.
• Proof of all federal tax payments made, including records of each quarterly estimated tax payment, detailing the date and amount.
• Comprehensive records for all claimed expenses and deductions, such as organized receipts, vendor invoices, and bank statements.
• All specific documentation required by the IRS for any claimed tax credit, as each has unique eligibility criteria and required forms.

The Process for Claiming a Refund

The most direct method for claiming a refund is on the business’s annual income tax return. When a company’s total estimated tax payments for the year exceed its actual tax liability, the overpayment is calculated on the return itself. For a corporation, this would be on Form 1120, while a sole proprietor would use Schedule C. The business can then elect to receive the overpayment as a refund or apply it to the next year’s estimated taxes.

When a refund is due because of a change to a tax return that has already been filed, the business must file an amended return. This is necessary for situations like discovering an overlooked deduction or qualifying for a tax credit after the fact. Sole proprietors and pass-through entities use Form 1040-X to make corrections. Corporations must file Form 1120-X.

In certain circumstances, a business can use a specialized form to expedite a refund. For example, Form 4466 can be used by a corporation to get a quick refund of an estimated tax overpayment. This is allowed provided the overpayment is at least 10% of the expected tax and a minimum of $500, and it bypasses the longer processing time of an amended return.

Receiving and Tracking Your Business Tax Refund

Processing times for business tax refunds are longer than for personal returns. A refund from an originally filed return may take several weeks, but refunds from amended returns (Form 1120-X or 1040-X) can take much longer, often six months or more, as they require manual review by the IRS.

The tracking tools for business refunds differ from those used for personal taxes. The “Where’s My Refund?” tool on the IRS website is only for individuals filing Form 1040. To check the status of a refund from an amended return, businesses must use the “Where’s My Amended Return?” tool, check the business’s online IRS account, or contact the IRS business tax line.

Once the IRS processes and approves the refund, the payment is issued. If the business provided its bank account information on the tax return, the refund will be sent via direct deposit, which is the fastest method. If no banking information was provided, the IRS will mail a paper check to the business address listed on the tax return.