Please note: As of 12:00 am PDT on April 9, 2024, we are no longer accepting applications for tax year 2020. Any completed applications (with supporting documentation) submitted on or after 12:00 am PDT on April 9, 2024, will be prepared and filed for tax year 2021 only. By continuing to utilize our service, you acknowledge and agree that SmartERC will not prepare nor file your Forms 941X for any quarter of tax year 2020.

Refundable vs Non-Refundable Tax Credits: Understanding the Differences


December 20, 2023

Refundable vs Non-Refundable Tax Credits

As a small business owner, you know that tax season involves many forms, calculations, potential deductions, and credits. Knowing the difference between refundable and non-refundable tax credits can help uncover the benefits to your bank account, while helping you seize the opportunity to secure your financial future. By exploring these opportunities, you could be well on your way to recovering capital for a variety of business needs, including rental expenses, operations costs, and much more.

My name’s Alejandra Astudillo. For the past 13 years, I’ve dedicated my career to tax accounting, serving as an internal revenue agent for the IRS. To help you better understand tax credits, we’ll go over the differences between these two types, discuss their implications, and highlight some common ones that eligible taxpayers like you can potentially benefit from.

What Is a Refundable Tax Credit?

Let’s start with refundable tax credits. These credits not only reduce your tax liability, but they can also result in a tax refund if the credit amount surpasses the tax owed. So, if you have a tax liability of $2,000 and qualify for a refundable tax credit of $2,500, you would eliminate your tax liability and receive a $500 refund. 

Refundable tax credits can greatly benefit lower-income individuals and families, offsetting expenses and boosting the amount of money received from the government.

What Is a Non-Refundable Tax Credit?

Non-refundable tax credits differ in that they can only reduce the tax liability to zero. These credits won’t result in a tax refund. In general, non-refundable tax credits can lower your tax liability but won’t provide any additional refund beyond the amount owed. 

So, if your tax liability is $2,000, and you qualify for a non-refundable tax credit of $1,500, your tax liability will drop to $500, but you won’t get a refund for the remaining credit amount.

The Difference Between Refundable and Non-Refundable Tax Credits

So, what is the key difference between refundable and non-refundable tax credits? Simply put, the potential for a tax refund. Refundable tax credits can provide filers and their families with extra money from the government, offering a financial boost even if they’ve already settled their tax liability. This means that business owners like you may receive a refund, which you could allocate towards hiring new employees, investing in new technology, expanding your business, and more.

Non-refundable tax credits, however, can only shrink the tax liability to zero and can’t result in another refund. It’s crucial to understand the differences between these two types of tax credits when planning tax strategies and optimizing available tax benefits.

refundable vs non-refundable tax credits

Is the Employee Retention Credit (ERC) a Refundable or Non-Refundable Tax Credit?

The Employee Retention Credit (ERC) is a refundable tax credit. In this instance, the refundable credit exceeds the taxes owed by the taxpayer, and they can be refunded the excess. 
In the case of the ERC, eligible employers can receive a refund for any remaining credit amount after it has been applied to their employment tax liabilities. The refundable nature of the ERC provides businesses with an opportunity to receive a direct cash benefit, even if they have no tax liability.

What Is a Tax Liability Event?

A tax liability event refers to a situation or event that gives rise to a tax obligation or responsibility for an individual or business entity. It signifies the occurrence of a taxable event, typically resulting in the assessment of taxes by the relevant tax authority. 
Tax liability events can vary depending on the applicable tax laws and regulations of a particular jurisdiction. Common examples of tax liability events include:

  • Earning taxable income
  • Conducting business activities subject to taxation
  • Selling assets at a profit
  • Receiving certain types of payments or benefits that are taxable
  • Other transactions or events that trigger tax obligations

When a tax liability event occurs, it signifies that the taxpayer is legally responsible for reporting the event to the tax authority and paying any associated taxes owed. It’s important for people and businesses to be aware of tax liability events relevant to their circumstances and to fulfill their tax obligations accordingly. 
Failure to do so may result in penalties, interest, and other potential tax consequences such as a lien or a levy against your business income, bank accounts, or assets. With this in mind, it’s important to stay up-to-date on changes in tax laws and regulations that may affect your obligations as a taxpayer. 
Consulting with a tax professional or the former IRS agents like the team at Smart ERC can help check for compliance with tax laws and accurate reporting of tax liabilities so you avoid any surprises along the way.

Other Types of Tax Credits

There are several types of tax credits available to eligible taxpayers. Let’s dive into some of the most common types of tax credits:

  • Working Family Household and Dependent Care Credit: This non-refundable tax credit is designed to help working families handle childcare or care for dependents with special needs. It offers a percentage-based credit on eligible expenses paid for the care of children, disabled spouses, or elderly parents.
  • American Opportunity Tax Credit: This partially refundable credit is aimed toward college-enrolled students. It can help offset tuition, fees, and course material costs for eligible students, offering up to $2,500 per student for the first four years of post-secondary education.
  • Child and Dependent Care Tax Credit: This credit is available to parents and caretakers who pay for childcare or adult dependent care services while working or job hunting. It provides a percentage-based credit on qualifying expenses, up to certain limits, based on the taxpayer’s income and number of dependents.
  • Healthcare Tax Credits: This non-refundable tax credit assists individuals and families in getting affordable healthcare coverage. Depending on income and other factors, taxpayers may qualify for premium tax credits to lower the cost of health insurance procured through the marketplace.
  • Homeowners Tax Credits: Various non-refundable tax credits are available to homeowners, such as the Residential Energy Efficient Property Credit, which encourages installing renewable energy systems, and the Mortgage Interest Credit, which provides relief for people with low to moderate income.

Understanding these types of tax credits can help taxpayers like you leverage the benefits they qualify for, potentially reducing their tax liabilities or adjusting their refunds.

Uncovering Your Non-Refundable and Refundable Tax Benefits

To uncover your tax benefits and navigate the complexities of refundable and non-refundable tax credits, Smart ERC is here to help you. Our network of former IRS revenue agents can provide beneficial guidance, helping you make the most of available tax credits based on your unique financial situation.
When it comes to tax credits, it’s essential to have a comprehensive understanding of their classification and eligibility requirements. Our expert network will work closely with you, helping you identify and claim all the tax credits you may qualify for. 

Why Partner with Smart ERC to Claim Tax Credits?

By partnering with Smart ERC, you can rely on the credentialed tax knowledge of our former IRS revenue agents to help you accurately report your information to the IRS. We understand the intricacies of tax credits and will guide you through the ERC process, helping you claim the credits you may be eligible for while reviewing for compliance with current IRS regulations.

At Smart ERC, we focus exclusively on the ERC to better serve your business. With our support, you can confidently claim your eligible tax benefits, helping you keep and recover more of your hard-earned money. 


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Having served as an IRS Auditor for over 13 years, I have acquired a deep understanding of the tax-related challenges that business owners encounter. My primary goal is to ensure that we deliver accurate and dependable information. We aim to provide you with peace of mind as we expertly guide you through the entire process.”

– Alejandra Astudillo, Former IRS Auditor

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