Subject: IRS Issues Notice on Taxation of Employer-Provided Cell Phones
Summary
Recently the Internal Revenue Service released Notice 2009‐46, Substantiating
Business Use of Employer‐Provided Cell Phones, regarding the taxation of employer provided cell phones and proposals consisting of procedures to document and
substantiate an employee’s business use of employer‐provided cell phones.
Background
Section 274(d)(4) states that no deduction for expenses incurred during the taxable
year in carrying on any trade or business shall be allowed with respect to any listed
property, unless the taxpayer substantiates by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement the amount of such expense
or other item, the use of the property, the business purpose of the expense or other item, and the business relationship to the taxpayer of persons using the property. The term “listed property” includes cell phones. The value of the business use of an employee’s employer‐provided cell phone is excludible from the employee’s income when the employer pays for this as it is classified as a working condition fringe benefit; however, the fair market value of any personal use of this fringe benefit is includible in the employee’s taxable income.
Although no formal guidance has been issued, the Service has enforced the
provisions of section 274(d)(4) in its examination of employers. This examination
activity has resulted in large assessments against employers that have failed to
comply with the documentation rules. If an employer fails to comply with these
rules, it is subject to the assessment of additional employment taxes, income taxes
that should have been withheld, interest, and potential penalties. However, the
release of Notice 2009‐46 and the subsequent issuance of a statement by IRS
Commissioner Douglas Shulman have indicated a potential change in the Service’s
approach on this issue.
Details
Notice 2009‐46 proposes simplified procedures for employers regarding the
documentation and substantiation of employee business and personal cell phone use
on employer‐provided devices. The Notice requests comments from the public
about the proposals and for suggestions for alternative approaches. The Notice’s
intent is to simplify the recordkeeping requirements, to reduce the burdens on
employers and employees, and to provide additional guidance regarding the taxation
of employer‐provided cell phones.
The three methods considered by the Service in the Notice are as follows:
- Minimal Personal Use Method
- Disregards a certain minimal amount of personal cell phone usage
- Allocates the entire use of the employee’s cell phone to business usage:
� This method would require that the employee demonstrate that the employee maintains and uses a
personal cell phone or similar device for all personal calls.
- Safe Harbor Substantiation Method
- A certain percentage of the employee’s total cell phone use is regarded as business use:
‐ The Service and Treasury Department propose that a ratio of 75 percent business use and 25 percent personal use be used.
- Statistical Sampling Method
- Statistical sampling methods would be used to estimate the personal use of the employee’s cell phone:
� The value of personal cell phone usage is calculated by multiplying the percentage of personal usage on the phone by the value of the total usage of the phone.
Commissioner’s Statement
Shortly after Notice 2009‐46 was released, Commissioner Shulman issued a statement on behalf of the Service and the Treasury Department recommending further congressional action on the issue. The statement asked Congress to amend the tax laws so that there would be no adverse tax consequence, for either the employer or
the employee, for personal use of employer‐provided devices. The release of the statement reflects the Administration’s judgment that technology has advanced to the point that the current‐law treatment of cell phones as listed property is obsolete. However, if Congress does not change the classification of cell phones as
listed property, the compliance burdens on employers and employees will still be reduced. The Commissioner stated that “IRS Notice 2009‐46 is the first important and practical step in the right direction, one which seeks to lessen the adverse impact of prior IRS audit positions.”
Should Congress remove employer‐provided cell phones from the category of “listed property” and classify these devices as a de minimis fringe, much of the scrutiny regarding the taxation of such devices would likely be diminished.
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