YOUR UNCLE SAM’S ON THE PHONE WITH A CHECK FOR YOUR BUSINESS

A call you want to answer: IRS will refund part of your prior year business phone bills – with interest – but you have got to do some math. We can help you pull it all together.

If your business paid for local and long distance telephone service from March 2003 through July 2006, you are probably due a refund of taxes you paid at the time.  

The IRS recently lost an important court case about the telephone tax that had been charged on long distance telephone service since the Spanish-American War. They decided to issue refunds to taxpayers who paid the telephone tax from March 2003 through July 2006. Individuals can use a simple formula to estimate the refund – and your accountants can do so for you where appropriate. Businesses with fewer than 250 employees can use a more complicated formula. We will help our clients claim this refund. But clients will need to do some homework to pull the numbers together. The method for businesses with more than 250 employees is not discussed here. Check out irs.gov for more guidance.

Is all this worth doing? That depends on the amount of your phone bills. If your business paid about $200 a month in phone bills, the refund would likely be a couple hundred bucks. At $1,000 per month, the refund would be more like $1,000.

Note for the unincorporated: Self-employed people with more than $25,000 in gross income (before expenses) can use the method discussed here. Anyone, if they want, can add up the tax on all 41 months of phone bills instead of using the method discussed here, but it will be more hassle.

Here is what you will need:

Your September 2006 phone bills. If you had more than one bill – a cell bill and a land line bill, for example, you will need all of them.

Your April 2006 phone bills – likewise, all telephone bills, if you had more than one.

The amount of your business telephone expenses in 2003, 2004, 2005 and 2006 – you can get this amount from your tax return or from your accounting records. If we were your accountants for these years, we can probably look up these numbers for you.  

Note: If you got separately got a refund of this tax from the phone company, then you cannot also claim a refund from the IRS.

Important, if obvious, note: You cannot claim a refund for months when you didn’t have business telephone expenses. If your business started in 2004, for example, you cannot claim telephone tax refunds for 2003. 

Here’s the math:

Add up all the September 2006 bills. Separately, add up just the federal telephone excise tax paid in September. Divide the total federal excise tax by the total phone bill to arrive at the percentage of the bill in September that was the tax.

Now repeat the same procedure for April 2006: divide the total federal excise tax paid by the total phone bill to arrive at the percentage of the bill in April that was the tax.

Next, figure the difference between the two percentages. For example, if September were 2.5% and April were 1.5%, the difference would be 1%. The IRS charmingly calls this difference the “FETP”. The FETP cannot be more than 2% - so even if the percentage difference is greater – say, 2.25%, forget it – you are limited to 2%.

Now, find your telephone expenses for 2003, 2004, 2005 and 2006. These would probably be on your tax returns or profit and loss reports for each such year.

Multiply the 2003 expenses by 10/12 to arrive at an estimate of the March – December expenses for that year. Multiply the result by the FETP to get the 2003 tax amount you can claim as a refund. Divide this figure by 10 to get the monthly refund amount for 2003.

2004 and 2005 are simpler: Multiply each year’s telephone tax by the FETP to get the tax amount you can claim as a refund for each year. Divide each figure by 12 to get the monthly refund amount for each year. (You need to have monthly figures for each year to fill out the refund claim form, as we will see in a little bit.)

Multiply the 2006 expenses by 7/12 to arrive at an estimate of the January – July expenses for that year. Multiply the result by the FETP to get the 2006 tax amount you can claim as a refund. Divide the result by 7 to get the monthly refund amount for 2006.

Whew.

The IRS will give the refund with interest. But they need the monthly expenses grouped in a certain way to do so. (That’s why we figured monthly refund amounts just now.)

Make groups of months as follows:

March, April, May 2003

June, July, August 2003

September, October, November 2003

December 2003, January and February 2004

March, April, May 2004

June, July, August 2004

September, October, November 2004

December 2004, January and February 2005

March, April, May 2005

June, July, August 2005

September, October, November 2005

December 2005, January and February 2006

March, April, May 2006

June, July 2006

We enter the resulting amounts on Form 8913, specially created this year to claim the refund.

Final note: You got to write off your telephone expenses from your business income when you paid them. That means that you will need to include the refund - including the interest -  in your business income, probably in 2007.