Are state and federal refunds taxable income for C-corporations?

[Jeanne2007]

I have a client that received refunds for his c-corporation from both state and IRS and included the income on their P&L.  Is it taxable income if they use cash method?

[PATAX]

Federal and State corporate tax refunds are not taxable regardless of whether your client uses cash or accrual basis. It is not income . The entry is debit cash and credit prepaid corporate tax. Just my opinion.

[sjrcpa]

State tax refunds are taxable on the federal return if you deducted the tax payment on an earlier federal return.

[PATAX]

@sjrcpa Who actually does that? Wouldn't the entry, when the tax payment was made, have been credit cash and debit prepaid corporate tax?

[sjrcpa]

For accounting purposes, yes. For a cash basis taxpayer I would deduct state taxes paid in the year paid.

[Jeanne2007]

My understanding is if the c-corporation paid estimates or overpaid throughout or end of the year, then it's money returned as an overpayment not as income.

https://www.irs.gov/pub/irs-drop/rr-03-3.pdf

LAW AND ANALYSIS

Section 451(a) provides that an item of income shall be included in gross income for
the taxable year it is received by the taxpayer, unless, under the method of accounting
used in computing taxable income, the amount is to be properly accounted for as of a
different period.

Section 1.451-1(a) of the Income Tax Regulations provides, in part, that under an
accrual method of accounting, income is includible in gross income when all the events
have occurred that fix the right to receive the income and the amount thereof can be
determined with reasonable accuracy.

[sjrcpa]

You said cash basis.

Were state taxes deducted?

[Jeanne2007]

The tax return states cash basis but on the return where the estimates are reported it's listed there as well as on the deduction screen.  On the deduction screen, it lists the 2021 estimate paid and the the estimates paid in 2021 for tax year 2021.

Sorry I am trying to get a better understanding.

[sjrcpa]

If the state tax refund is from state taxes that were previously deducted it is taxable income.

[Jeanne2007]

Thank you!

One more question.  If the client over-paid a federal estimate in 2021 for tax year 2020 and received a refund, would that be considered income?

[sjrcpa]

Federal tax refunds are not taxable income. Federal tax payments are not deductible.

[Jeanne2007]

Thank you so very much!

[Judd Kuo]

Federal refunds for C-Corporations are taxable.  However, Federal refunds for S-Corp and LLC are not taxable.   I have a C-corporation established in 1997 and have been running it to now.  I have filed taxes through using Turbo Tax sine 1997.

[abctax55]

@Judd Kuo 

Welcome to this forum that is intended to be for tax professionals.

****

Even tho Turdohhho tax has allowed you to do that 27 years, that is incorrect. Federal taxes are not deductible, ergo the refunds are not taxable income.  

And, with very few exceptions, S-Corps and LLC's do not PAY any Federal taxes

[Strongsilence-CPA]

You might wish to consider amending your prior year tax returns.

@Judd Kuo