Small Business Break: Get a Refund of Taxes Paid in Previous Years

(June 2024)

Small Business Break: Get a Refund of Taxes Paid in Previous Years

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Running a small business involves juggling numerous responsibilities, and amidst the daily challenges, it’s not uncommon for you to miss out on potential tax savings. As a small business owner, one way for you to manage your finances and taxes efficiently is to get a refund of your tax payments in previous years, if you qualify. A tax refund helps to improve your cash flow, reduce your debt, invest in your business, or save for the future. But how do you know if you are eligible for a tax refund, and how do you claim it?

This article guides you through the steps to get this tax refund—Of course that depends on your business entity type and tax status.

To get a refund of your old tax payments:

  1. Check Your Business Entity Type’s Tax Refund Eligibility, Implications and Requirements
  2. Review Your Past Tax Returns and Payments
  3. Apply for a Tax Refund or Carryback

Wish to learn more? Go on!

1. Check Your Business Entity Type’s Tax Refund Eligibility, Implications and Requirements

If you want a refund of past taxes, you must first determine your business entity and tax status. These factors affect how you report your income and expenses, how you pay taxes, and how you claim refunds. There are four main types of business entities: sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each of these entities has different tax implications and requirements.

For Sole proprietorships, partnerships and Limited Liability Companies, you can claim a refund of any overpaid taxes by filing an amended return (Form 1040X), while Corporations can claim a refund of any overpaid taxes by filing an amended return (Form 1120X). All of these claims must be within three years of the original due date or within two years of the payment date, whichever is later.

The tax refund process distinguishes pass-through firms like sole proprietorships, partnerships, and LLCs from C-corporations. Pass-through businesses can only get a tax refund for the current year, whereas C-corporations can get two years back. The carryback tax provision allows C-corporations to use their current year losses to balance their past year profits and seek a refund of their taxes. In contrast, pass-through enterprises can only use a carryforward to apply current-year losses to future-year profits and lessen their tax liability.

2. Review Your Past Tax Returns and Payments

To get a refund of past tax deposits, evaluate your tax returns and payments for those years. You can view your past tax returns and payments online, by mail, or by phone. The IRS website, IRS2Go app, and IRS Get Transcript tool allow you to view and download your tax transcripts, which contain tax returns and account activity information. You can seek a copy of your tax return by filing Form 4506 and paying. To access your tax records, contact 800-829-1040 or visit your local IRS office.

Once you have your past tax returns and payments, you need to analyze them and look for any errors or omissions responsible for causing you to overpay taxes. Some common errors or omissions include: missing or incorrect deductions or credits, unreported income or expenses, incorrect filing status or exemptions, miscalculated tax liability or payments, and incorrect or missing forms or schedules. For tax return accuracy and completeness, use the IRS Interactive Tax Assistant, Tax Map, or Publication 17. To find and fix mistakes, visit a tax professional or use tax software.

File an amended return and obtain a tax refund within the statute of limitations if you identify errors or omissions. You have a limited time to claim a refund or carryback. The statute of limitations is three years after filing your return or two years from paying the tax, whichever is later. Some exclusions and special regulations may lengthen or shorten the statute of limitations, depending on your scenario. The IRS Where is My Amended Return tool, IRS Topic No. 308, and IRS Publication 556 explain the statute of limitations and deadlines for filing amended returns and claiming refunds.

3. Apply for a Tax Refund or Carryback

The next step for you is to apply for a tax refund or a carryback, depending on your situation and preference. A tax refund is a payment from the IRS or state authorities to you when you pay more taxes than you owe. A carryback is a tax provision that allows you to apply your current year’s losses to offset your past year’s profits and get a refund of your tax payments on those profits. Your business’s tax status, entity type, and financial needs determine whether you qualify for a refund, a carryback, or a mix of the two.

To file a claim for a tax refund or a carryback, you need to fill out and submit the appropriate forms and documents to the IRS and state authorities. The forms and documents you need depend on your business entity type and tax status, as well as the type and amount of your refund or carryback. Here are some of the common forms and documents you may need:

  • Form 1040X: You use this form to alter your personal tax return if you are a solo proprietor, partner, or LLC member. You must file a Form 1040X for each refund or carryback year. Attach Schedule C, Schedule E, and Schedule K-1 if the modifications affect them.
  • Form 1120X: As a C-corporation or LLC, you utilize this form to alter your corporate tax return. Each year you desire a refund or carryback, file Form 1120X. You must attach Form 1125-A, Form 1125-E, and Form 4797 if the revisions affect them.
  • Form 1139: C-corporations and LLCs subject to C-corporation taxes, utilize this form to obtain a tentative refund or carryback. Get a speedy refund of your paid taxes in the past two years without filing an amended return using this form. Fill out this form within 12 months of the loss’s tax year. Attach your loss year tax return and any forms or schedules that compute the loss and carryback, such as Form 1120, Form 1125-A, or Form 4797.
  • Form 1045: As a sole proprietor, partner, or LLC member subject to the same taxes, you utilize this form to obtain a tentative refund or carryback. Without filing an amended return, this form can refund taxes paid in the last two years quickly. This form must be filed within 12 months of the loss’s tax year. Attach your tax return for the loss year and any Schedule C, Schedule E, or Schedule K-1 forms that calculate the loss and carryback.

You can mail or electronically file your forms and documents to the IRS and state authorities, depending on their availability and requirements. You can use the IRS Where’s My Refund tool, the IRS Where’s My Amended Return tool, or the IRS Topic No. 303 to check the status of your refund or carryback, and the expected time frame for receiving it.

Getting a refund or a carryback has its pros and cons, and you need to weigh them carefully before making a decision. Here are some of the advantages and disadvantages of getting a refund or a carryback, and how they affect your cash flow and tax liability:

  • Refund: When you pay more taxes than you owe, the IRS or state pays you a refund. Refunds give you money for business or personal purposes, improving cash flow. A rebate reduces your tax liability since you pay less overall. However, a refund of the excess tax payments may indicate you gave the government an interest-free loan. The IRS and state must evaluate and approve your updated return and refund claim, which might delay processing and receipt.
  • Carryback: A carryback allows you to use current year losses to balance past year gains and get a tax return. A carryback can boost cash flow by returning money for business or personal usage. Paying fewer taxes overall using a carryback reduces your tax liability. However, a carryback might diminish your future tax benefits by using up losses that could have reduced your taxes. Due to additional papers and paperwork and IRS and state regulations, applying for a carryback can be complicated and time-consuming.

You can choose to get a refund, a carryback, or a combination of both, depending on your business entity type, tax status, and financial needs. Consider your cash flow situation, your tax liability, and your business goals, and make the best decision for your small business.

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Recap

Examine your business entity type’s eligibility, requirements and implications for tax refunds, examine your prior tax returns and payments for the years you wish to claim a refund and apply for a tax refund or a carryback, which is a function of your circumstances and preferences, to receive a refund of the taxes payments in previous years.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.

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