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IRS Proposes Change to Tax Treatment of Employer-Provided Cell Phones

As cellular telephone technology continues to evolve, many employers and employees are finding the tax substantiation requirements for employee-provided cell phones increasingly cumbersome. Recently, the IRS issued Notice 2009-46, which aims to change the substantiation requirements for employee-provided cell phones. Advocates of the proposed simplified substantiation methods argue that technological advances have rendered the current rules obsolete.

The Internal Revenue Code currently disallows a percentage of expenses, based on personal usage, related to employer-provided cell phones as nondeductible (or a taxable benefit to the employee) and classifies the cell phones as "listed property." This classification limits the deduction allowed for depreciation expense on the cell phones to the percentage used for business. For example, an employer-provided cell phone used half for personal use and half for business use would allow the employer to deduct only 50% of the current year's related expenses and depreciation expense for tax purposes. While the concept is fairly simple, the application is not. In order for the employer to claim any deductions related to business use, the individual employees must substantiate the amount he or she used during the year for business as opposed to personal use. This requires the employee to go through all phone bills in detail and classify which calls fall into each respective category. Further complicating the matter is the advent of text messaging and the ability to link e-mail to cell devices, making the determination of a business use percentage even more difficult and time-consuming, if not impossible.

Notice 2009-46 was issued on June 16, 2009 and asked for input to simplify compliance. The Notice provided the following three potential simplified substantiation methods currently under consideration:

1. Minimal Personal Use Method
2. Safe Harbor Substantiation Method
3. Statistical Sampling Method

Each of these proposed methods would remove cell phones from being classified as listed property and would simplify the process of determining a business use percentage for deducting related expenses. The specifics of each method are described below.

1. The Minimal Personal Use Method would allow the employer to deduct 100% of cell phone-related expenses given that personal use of employer-provided cell phones is "minimal." Under this method, the employee would be required to either substantiate that he or she maintains a separate cell phone for personal use or adhere to keeping personal use minutes under a specified amount deemed "minimal."
2. The Safe Harbor Substantiation Method would allow employers to deduct a specified percentage of expenses related to all employer-provided cell phones regardless of actual business and personal usage amounts. Currently, the IRS and U.S. Treasury are proposing a 75% deduction.
3. The Statistical Sampling Method would allow employers to measure the personal and business use of an employee using statistical sampling techniques to determine a percentage of use that could then be applied to all employees to calculate the deductible amount of related expenses.

Also included in the notice is a stipulation that employers wishing to use any of these methods would be required to implement a written policy defining the method to be used and any subsequent employee requirements. In addition to these three methods, employers would also have the option of continuing to treat employer-provided cell phones and their related expenses as currently defined in the Internal Revenue Code.

For further information, please contact Amanda McQuin at 312-980-2991, Mike Calahan at 312-980-2996 or your Blackman Kallick representative.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.