Giving Clarity To This Year’s Most Confusing Business Tax Issue

Businesses and households can claim an estimated $13 billion in credits on their 2006 Federal Income Taxes. Back in June, the Supreme Court ruled that every phone bill in the country is overpaid, leading to a hundred year old excise tax being repealed.

The tax was designed to be collected on telephone traffic where rates depended upon distance. For decades this was standard practice, but beginning in the 90s telephone carriers began offering flat monthly fees services. Even as these bundled rate structures became commonplace, the government kept collecting the tax, industry sued and won - repeatedly. Now businesses, non-profits and households can make their claims on Form 8913, Credit for Federal Telephone Excise Tax Paid.

At home you can expect to get at most a dinner and a movie from Uncle Sam. The credit for private residences is a flat fee structure ranging from $30 to $60. For businesses and non-profits it’s another case entirely. There’s no way to develop a flat rate credit in an environment where telecom expenses can range from a few hundred dollar to tens of millions of dollars annually.

The thumbnail formula to estimate a claim is that you’ll receive a $1,230 credit for every $1,000 in qualifying long distance that you spend monthly. Here’s the math: 3% tax x 41 months x average qualifying telecom expense.

Expect that sorting out the qualifying expenses to be time consuming and require a steep learning curve. It will place a large burden on Finance and IT to start planning and preparing. In fact, Big Four accounting firms like KPMG are for the most part only offering to calculate the credit for their clients with annual telecom budgets over $500,000. The CPAs we’ve spoken to personally are by and large just making their clients aware of the issue, but are not calculating the claim for them.

To give you some example of the underlying complexity, consider a simple multi-location business. Whether each location is in the same state or across several states, each location is likely in a separate LATA (Local Access and Transport Area), each with its own tariff. To decipher the rules and regulations, someone would have to obtain each tariff from the bureaucrats at multiple public utility commissions and then read through them. To say these tariffs are long and dry is an understatement.

In today’s environment it’s also common to have multiple carriers. Usually this is a "land line" carrier and a cell phone carrier. However organizations these days also have toll-free carriers, conferencing and data services and even wireless radio and paging to consider. If you’ve grown through acquisitions, you may have multiple carriers for the same type of service due to legacy contracts. Expect each carrier to have different procedures for obtaining historical invoices and for asking clarifying questions.

To help simply things, the IRS announced a "special formula" for businesses in November. Be warned, using the formula can be costly because businesses trade simplicity for cash. The formula imposes a cap on the credit based on number of employees. Businesses with fewer than 250 employees are capped with a 2% claim and for larger employers, the cap is 1%. However, if companies roll up their sleeves and do the entire calculation, there is no cap, so they can recapture up to the full 3%. The question is, what makes sense for you?

As of press time, the special formula also does not specifically address cell phones. So companies can claim their cell phones using the formula, but risk having the IRS exclude these expenses later. If you have significant cell phone usage you may want to play it safe and avoid the special formula, and calculate the entire claim.

Businesses should consider outsourced telecommunication auditing companies if they have a limited staff or limited time. Not only can they calculate the credit, but they can use the same data to secure credits for any overpayments they find and also make best-in-class recommendations that can lower telecom expenses going forward.

First appeared in In Business magazine, Feb, 2007.