Tax Article -IRS Unveils Formula for Business and Exempts to Estimate Telephone Tax Refunds

Following up on individual safe harbor amounts for telephone tax refunds, the IRS has released a formula that businesses and exempt organizations can use to estimate their telephone tax refunds.  The IRS will start refunding in January the long-distance portion of the federal telephone excise tax billed after February 28, 2003 and before August 1, 2006.  In lieu of using the formula to claim the refund, documentation of actual excise tax expenses for the entire period must be produced.

Background

In May, the IRS announced that it would no longer collect the long-distance portion of the federal telephone excise tax.  Moreover, taxpayers would be able to request refunds of taxes paid over a 41-month period (from March 1, 2003 through July 31, 2006).  When the IRS announced the safe harbor amounts for individuals in August, it indicated that it was exploring a simplified method for businesses to calculate their refunds.  The new formula is the result.

• Reminder. The safe harbor amounts ranges from $30 to $60.  Individuals can elect not to take the safe harbor amounts and seek a refund of the actual amount of tax paid.
• Caution. Only the long-distance portion of the federal telephone excise tax will be refunded.  The IRS continues to collect the tax on local telephone service.
• Planning Tip.  Taxpayers must make sure that they have not received a credit or refund from their telephone service provider.  If they have, they cannot double-dip and claim the federal refund.

New Formula

1. Divide the amount of the federal telephone excise tax that appears on the taxpayer’s April 2006 telephone bill by the amount of the total bill.  The result is the percentage of the bill attributable to federal telephone excise tax.
1. Comment. For this first step, taxpayers do not have to separate long-distance tax from local service tax.  Taxpayers with more than one type of service or provider (for example, land line, fax, cellular, local, long distance, or bundled) should combine all bills with an April statement date.  The April 2006 bill is the bill with an April 2006 statement date.
2. Divide the amount of federal telephone excise tax that appears on the taxpayer’s September 2006 bill by the amount of the total bill. 
1. Comment.  The September bill should not reflect any long-distance tax as the IRS stopped collecting it this summer.  The September 2006 bill is the bill with a September 2006 statement date.
3. Subtract the September percentage from the April percentage.  The resulting percentage represents the federal long-distance tax.
4. Multiply long-distance percentage by the amount of total telephone expenses shown on bills dated after February 28, 2006 and before August 1, 2006.  The result is the refund amount, subject to caps for large and small employers.

Caps

The refund for businesses and exempt organizations under the formula is capped at two percent of total telephone expenses for small employers during the March 1, 2003 and July 31, 2006 period.  Small employers are employers with 250 or fewer employees.  The refund for employers with 250 or more employees is capped at one percent of telephone expenses.

• Planning Tip. Part-time employees are considered the same as full-time employees.  Household employees, volunteers, pensioners, and active members of the armed forces are excluded.

Example

ABC Co.’s April 2006 telephone bill reflects total charges of $1,000.  The federal telephone excise tax was $28.  Dividing $1,000 by #28 yields 2.8 percent.  ABC’s September 2006 telephone bill reflects total charges of $1,100.  The telephone excise tax was $16.50.  Dividing $1,100 by $16.50 yields 1.5 percent.  ABC next subtracts 1.5 percent from 2.8 percent.  The result—1.3 percent—is ABC’s long-distance percentage tax.

ABC’s total telephone expenses for the period beginning after February 28, 2003 and ending before August 1, 2006 were $40,000.  ABC multiples its total telephone expenses of $40,000 by 1.3 percent.  The result is a refund of $520 to which interest is added.

• Reminder. If ABC is a small employer, its refund would be capped at two percent.  If ABC is a large employer, its refund would be capped at one percent.

Eligible taxpayers

All corporations (C and S), partnerships, trusts and estates, and exempt organizations may use the formula.  Individual owners of rental property and self-employed individuals, including independent contractors, sole proprietors and farmers, also can use the formula but only if they report gross rental and business income totally more than $25,000 on their 2006 federal income tax return.  The IRS explained that this is the amount shown as gross income on Schedule C, Line 7; gross receipts on Schedule C-EZ, Line 1; rents received on Schedule E, Line 3; and gross income on Line 11, Schedule F.

Foreign businesses and exempt organizations that paid the federal tax on the long-distance portion of their telephone service are also eligible for the refund.  They may use the formula or calculate their refunds based on the actual amount of tax paid.

• Comment. The IRS instructed that individuals with more than one activity who complete multiple businesses or rental schedules should add together all gross rental and business income amounts reflected on these schedules.  Married couples filing joint returns should combine their gross rental and business amounts from these schedules.
• Some taxpayers may not have telephone expenses broken down by month.  In this case, they can base their estimate on amounts reported as business-related telephone expense on their 2003 through 2006 returns.  Taxpayers should prorate the telephone expense amount for a particular tax year if part of the year is outside the 41-month period.

Form 8913 required

Businesses and exempt organizations must use Form 8913, Credit for Telephone Excise Tax Paid, to claim their refunds.  Form 8913 should be attached to the business’ regular 2006 income tax return or to the exempt organization’s Form 990-T.

• Comment. Refunding the long-distance portion of the federal telephone excise tax is going to be a massive undertaking for the IRS.  Speaking at the 2006 Conference of the Council for Electronic Revenue Communication Advancement (CERCA) in Arlington, Va., earlier this month, IRS Commissioner Mark Everson said that he anticipates, “a very challenging filing season in 2007.

Please contact Feeley & Driscoll's Boston Accounting Firm by Email or call us at 1 (888) 875-9770.

related links