The IRS says it is looking to make it easier for taxpayers to comply with recordkeeping requirements for employer-provided cell phones. Others see this as another attack on small business. A new notice from the IRS confirms several IRS proposals to simplify the procedures under which employers substantiate an employee’s business use of employer-provided cellphones. The notice also requests suggestions for alternative approaches.
In 2008, two identical bills-H.R. 5450 and S. 2668, both entitled “Modernize Our Bookkeeping In the Law for Employee’s Cell Phone Act of 2008″-were introduced in the House and Senate to remove cell phones and similar telecommunications equipment from the category of listed property. These measures, which had bipartisan support, and were backed by a number of companies and business associations, were never enacted. Perhaps that is why IRS is taking the matter into its own hands.
Under Internal Revenue Code Section 132, an employee may exclude from gross income the business use of an employer-provided cell phone as a working condition fringe benefit. However, because cell phones are listed property in Code Section 280F, strict substantiation requirements must be satisfied for business cell phone usage to qualify for the code Section 132 exclusion. Moreover, any personal usage of an employer-provided cell phone is a taxable fringe benefit. Thus, the current rules require documentation of the business and personal use of the cell phone.
Three methods under consideration. IRS is 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.
Minimal personal use method. IRS is 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 the 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 usage of an employer-provided cell phone.
Safe harbor substantiation method. IRS is considering a safe harbor method under which an employer would treat a percentage (proposed to be 75%) of each employee’s use of an employer-provided cell phone as business usage and the balance as personal use.
Statistical sampling method. IRS is 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 for substantiating meals and entertainment, 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 sought. IRS seeks comments on the methods described above and on alternative suggestions. It is particularly interested in comments on the following:
The specific provisions that should be required to be included in an employer’s written policy prohibiting personal use of employer-provided cell phones;
The types of employee records sufficient to establish that the employee maintains and uses a personal cell phone for purposes of the first proposed minimum personal use method described above;
How to define a specified amount or type of “minimal” personal use that should be disregarded in determining usage of an employer-provided cell phone for purposes of the second proposed minimum personal use method described above.
The business use percentage that should be applied in the proposed safe harbor substantiation method and the data and rationale upon which it is based;
The methods currently used by employers to determine the fair market value (FMV) of an employee’s use of an employer-provided cell phone; and
Whether a simplified method of determining the FMV of an employee’s use of an employer-provided cell phone would be appropriate, and, if so, suggested simplified methodologies for determining such fair market value.
What is next? A tax on employer-provided water, toilet paper, soap, coffee? In my opinion, when the IRS says it is looking for a way to make something easier for taxpayers, watch out!
Tags: business tax, cell phone tax, cellphone tax, corporate tax, internal revenue code, IRS, IRS Notice, mclaughlin & quinn, Moore McLaughlin, Tax planning