Federal Proposal to Tax Employee Cell Phones

OML staff is monitoring Internal Revenue Service (IRS) Notice 2009-46, entitled “Substantiating Business Use of Employer-Provided Cell Phones”.  It is asking for public comment on a proposal that one-quarter of employees' use of work cell phones is personal use and therefore subject to tax as a fringe benefit.  This is one of several alternatives for taxation of employer-provided cell phones.  Current law (reportedly largely ignored by employers/employees) requires that the value of those cell phone services be included in a worker's gross income, unless the employee keeps detailed records showing that the cell phone is used only for work.  Public comment is due on September 4, 2009.

DISCUSSION: IRS Website
If an employer provides a cell phone to an employee, and the employer acquires and pays the costs of using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the employer’s cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit excludable from the employee’s gross income and the cell phone expense is a deductible business expense for the employer, provided that the substantiation requirements of § 274(d) are met. However, to the extent the employee uses the employer’s cell phone for personal purposes, the fair market value of such usage is includable in the employee’s gross income. The employer’s cost to provide the cell phone is not determinative of the fair market value of the benefit received by the employee.
General Requirements
As discussed in greater detail below, the IRS and Treasury Department are considering three alternative methods to simplify the substantiation requirements applicable to employee usage of employer-provided cell phones: a minimal personal use method, a safe harbor substantiation method, and a statistical sampling method (or a combination of the foregoing). Any simplified cell phone substantiation method will be optional; taxpayers may continue to comply with current § 274(d) substantiation requirements.
The IRS and Treasury Department contemplate that any taxpayer who wishes to use a simplified cell phone substantiation method will be required to implement a written policy that requires employees to carry and use the employer-provided cell phones in connection with the employer’s trade or business and that prohibits personal use of employer-provided cell phones, except for minimal personal use, similar to the requirements currently applicable to employer-provided automobiles in § 1.274-6T. In addition, the IRS and Treasury Department anticipate requiring that the employer must reasonably believe that the cell phone is not used for personal purposes except for minimal personal use.
1. Minimal Personal Use Method
The IRS and Treasury Department are considering two proposals that would allow an employer to deem all of an employee’s usage of an employer-provided cell phone as business usage. Under the first proposal, the entire amount of an employee’s use of an employer-provided cell phone would be deemed to be for business purposes if the employee can account to his or her employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee’s work hours.
Alternatively, the second proposal would define a specified amount or type of “minimal” personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone. For example, “minimal” could be defined by reference to a particular number of minutes of use or for certain personal purposes.
2. Safe Harbor Substantiation Method
The IRS and Treasury Department are considering a safe harbor method under which an employer would treat a certain percentage of each employee’s use of an employer-provided cell phone as business usage. The remaining percentage of use would be deemed to be for personal purposes. For this proposal, the IRS and Treasury Department propose a business use percentage of 75 percent.
3. Statistical Sampling Method
The IRS and Treasury Department are considering a proposal that would allow employers to use statistical sampling techniques to measure an employee’s personal use of an employer-provided cell phone. In general, an employer could use an approved statistical sampling methodology similar to that provided in Rev. Proc. 2004-29, 2004-1 C.B. 918, to determine the percentage of personal use of employer-provided cell phones. The employer would multiply that percentage times the value of each employee’s total usage to determine the value of personal usage. The remaining portion of the employee’s usage would be deemed to be for business purposes.
Comments must be submitted in writing on or before September 4, 2009, and should include a reference to Notice 2009-46. Submissions should be sent to:
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2009-46), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Alternatively, comments may be submitted electronically directly to the IRS via the following e-mail address: [email protected]. Please include “Notice 2009-46” in the subject line of any electronic communication. All comments will be available for public inspection and copying.

 

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