A new tax credit, applicable only for 2006 filings, could be worth serious money to your company. But if you are like many other U.S. taxpayers, you may not know about this program. Information from the Internal Revenue Service indicates that many filers, in fact, are not aware of the program.
Luckily, if you are among the 90 percent of corporations that file their U.S. tax return on Sept. 15 – five months after the nominal deadline – there is still time to claim the refund. In fact, one of our clients who just filed is getting a tax credit of more than $50,000.
Businesses, tax-exempt organizations and individuals can request a refund of taxes they paid on long-distance service under an agreement known as the Telephone Tax Excise Refund.
Designed to refund previously collected federal excise taxes, the credit is available to anyone who paid taxes on landline, wireless, or voice over Internet protocol (VoIP) service billed after Feb. 28, 2003, and before Aug. 1, 2006. This refund can be requested with interest as a credit on your 2006 federal income tax return.
(While this refund is available to individual taxpayers, too, this column focuses on the refund for businesses.)
Why is the government refunding these taxes?
Recently, a number of taxpayers successfully sued the government claiming that the 3-percent telephone tax did not apply to long-distance service as it is billed today. Rather than continue litigating, the IRS decided to discontinue collecting the long-distance portion of the tax.
Therefore, the IRS is following these judicial decisions and refunding the portion of the tax charged on long-distance calls. The IRS is also refunding taxes collected on telephone service under plans that do not differentiate between long-distance and local calls, including bundled service. The telephone tax continues to apply to local-only service, and the IRS is not refunding taxes charged on local-only service.
Businesses and tax-exempt organizations
Corporations, nonprofits, partnerships, trusts and estates that wish to claim their refund must use one of two methods to calculate the amount of their refund: actual tax paid or the estimation method.
Using the actual method, businesses should compile the total tax paid on the company’s telephone expense bills for the 41 months from March 1, 2003, to July 31, 2006. If telephone expense records are maintained on an annual basis, you must prorate the annual amount equally to each month of that year.
Under the estimation method, a business must use actual data from April 2006 and September 2006 phone bills to derive a formula that calculates an estimated percentage of long-distance federal excise tax paid. This percentage is then applied to actual telephone expenses during the 41-month period, capping it at 2 percent or 1 percent depending on the number of employees at the organization. Organizations with 250 or fewer employees are capped at 2 percent; organizations with more than 250 employees at 1 percent.
Sole proprietors
Depending on gross income reported on Schedule C of the personal return, sole proprietors have a few more options for calculating their refund.
On gross income of $25,000 or less, sole proprietors can claim the standard individual taxpayer refund of up to $60 (based on the number of exemptions claimed on their personal return), or they can claim a refund of actual tax paid.
On gross income in excess of $25,000, sole proprietors have three choices: (1) take the standard; (2) claim a refund of actual taxes paid on both personal and business expenses; or (3) claim a refund based on actual tax paid on personal expenses and on the estimation method for business expenses.
Requesting your refund
Of course, if you have received a credit or refund of the tax from your telephone service provider, you are not eligible for the tax refund. Most taxpayers can request their refund by completing Form 8913, Credit for Federal Telephone Excise Tax Paid, and filing it with their regular 2006 income tax return. Tax-exempt organizations should attach this form to their Form 990-T.
Partnerships and S corporations should file Form 8913 with their 2006 Form 1065 or Form 1120S and will receive the refund directly. The refund, plus any interest, must be reported on the entity’s return for the year received or accrued and allocated to the partners or shareholders on their Schedule K-1 for that tax year.
While the IRS predicted that the refund rules would be simple, they aren’t, especially if you have more than one phone service. (For more information, visit the IRS Web site at www.irs.gov and click on the “Telephone Excise Tax Refund” link.)
This has been a general discussion and is not intended as specific advice. Always consult your tax adviser about your particular situation.
Tarra L. Curran is a tax principal with Tofias PC, an accounting firm with offices in Providence, Newport, Cambridge and New Bedford. She can be reached at tcurran@tofias.com.
