On June 8, the IRS issued detailed plans to tax employees for use of company issued mobile phones. Current tax law requires the value of employer-issued cellphones to be included in workers' gross income, unless an employee kept detailed records showing the phone was used only for work. Due to the complexity of this requirement, it has almost been universally ignored by both employers and employees. The IRS, in an effort to simplify the law, is considering three methods for a new tax law:* Minimal Personal Use * Safe Harbor * Statistical Sampling Method
The Minimal Personal Use method may either require an employee to keep detailed records of personal usage or set aside acceptable minimal personal use time. The Safe Harbor method assumes a business use percentage of 75%. The Statistical Sampling Method would allow an employee to 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 IRS is inviting comments to the notice through September 4, 2009. The method selected can potentially have a significant impact on the use of cellular phones as extensions behind an employer's enterprise communications system, especially if the employer and/or employee will pay increased taxes. The Wall Street Journal article on the IRS action calculated that under the Safe Harbor method a worker in the 28% tax bracket, whose mobile communications device costs the company $1,500 a year, could see $105 in additional federal income tax.
Congress is currently considering proposals to repeal the tax and are backed by the cellular carrier providers who consider the law antiquated in this era of ubiquitous mobile communications. Cellular rates have declined significantly during the past 20 years: current taxable cost benefits of personal usage during off-hours or weekends would be minimal based on current rate plans. Enterprise communications system suppliers and end user customers should also back congressional repeal if the evolution from wired to wireless communications for enterprises is to move forward with all the accompanying benefits.
The following is direct from Notice 2009-46, pages 13-15 (PDF):
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.
B. Simplified Fair Market Value Determination
To the extent that an employee's use of an employer-provided cell phone does not qualify as a working condition fringe benefit (because the employer does not satisfy § 274(d) or the cell phone is used partially for personal purposes), the fair market value of an employee's use of the employer-provided cell phone is a taxable fringe benefit that is includable in the employee's gross income. An employer's cost to provide the cell phone is not determinative of the fair market value of an employee's fringe benefit. The IRS and Treasury Department are interested in understanding the methods employers currently use to arrive at the fair market value to an employee of an employer-provided cell phone. The IRS and Treasury Department are considering whether a simplified valuation method would be helpful and appropriate to determine such fair market value.
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
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.
B. Simplified Fair Market Value Determination
To the extent that an employee's use of an employer-provided cell phone does not qualify as a working condition fringe benefit (because the employer does not satisfy § 274(d) or the cell phone is used partially for personal purposes), the fair market value of an employee's use of the employer-provided cell phone is a taxable fringe benefit that is includable in the employee's gross income. An employer's cost to provide the cell phone is not determinative of the fair market value of an employee's fringe benefit. The IRS and Treasury Department are interested in understanding the methods employers currently use to arrive at the fair market value to an employee of an employer-provided cell phone. The IRS and Treasury Department are considering whether a simplified valuation method would be helpful and appropriate to determine such fair market value.
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
