Finally, You Get the Credit You Deserve

If you're like most people, you sometimes get irritated when your phone bill arrives and you see the taxes charged on it. Between excise taxes, universal access charges, and sales taxes (in some states), government fees (a/k/a taxes) comprise a hefty portion of your telephone bill.
While there is not much you can do about these taxes, you may take comfort in the fact that some services ceased being taxed in August 2006. After years of litigation, the Internal Revenue Service gave up and announced it will no longer collect the 3% Federal Excise Tax on long-distance and bundled services. Great - but what about the taxes collected throughout the litigation? Does the government just get to keep the money as a gift? Well, no - in fact, for 2006, individuals, businesses and not-for-profit groups will get a credit against their income tax or a refund of the tax.

As already mentioned, there are two types of service on which tax was charged that may give rise to the refund. The Telephone Tax Credit was originally intended to repay people for taxes paid on long-distance charges. If your telephone or long-distance company bills you separately for long-distance calls, you will use these charges as a base for determining the amount due you. In many instances, however, the company that provides your local service is also your long-distance carrier. This is known as "bundled" service and, in some cases, the bills do not separate local and long-distance charges. If you have bundled services where the local and long-distance components are not separated, you are entitled to a credit to offset taxes paid on the entire bill. The main providers you will need to consider are: traditional landline companies, cellular companies and, to a lesser extent, Voice-IP services. Additionally, if you used prepaid cards that were designated as "long-distance" only, the 3% excise tax is also refundable.

Individuals will be able to either claim a credit for the actual taxes paid on billings after February 28, 2003 and before August 1, 2006 or use a standard amount ranging from $30 to $60. To receive a credit for the actual taxes paid, you must be able to produce your telephone bills to support the amount claimed. The standard amount is based on the exemptions on your 2006 income tax return as follows:

Businesses and non-profits cannot avail themselves of the standard amount. For these entities, the IRS has provided a formula-based approach as well as allowing the business or not-for-profit (Business Entity) to use actual taxes paid.

If a Business Entity wishes to use actual taxes paid, it will be required to produce all of the telephone bills supporting the tax credit claimed if it is audited. In many cases, the Business Entity's long-distance and bundled usage will not justify digging through old records to get exact numbers. Businesses that wish to do so can use an IRS formula based on the change in the effective tax rate on the entire telephone bill (including taxes) between the months of April and September. These months were chosen because the IRS knows the tax was charged on April telephone bills and not on September billings.

Depending on your long-distance and bundled service usage, the Telephone Tax Credit can add up. The best approach to calculating the credit can only be determined after a review of your monthly telephone charges. For example: two companies have the same telephone costs, but Company A's usage is mainly local service and Company B has high long-distance costs. Though not a certainty, it's likely that Company A would benefit very little by spending a great deal of time pulling old telephone records because the difference in the credit amount would not be that significant. Company B, however, may find that calculation of the credit using actual taxes paid would yield a much higher return than the IRS formula-based approach.

Further information regarding this credit can be found at the IRS website, or you can give us a call and we'll be glad to help you choose the approach that is right for you.

Have a wonderful Valentine's Day.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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