The IRS is asking the public to weigh in on the question of how to track cell phone usage when employers provide the phones to employees.
The value of the use is supposed to be excludable as a working condition fringe benefit, but any personal use is income to the employee.
In 1989, cell phones were designated as listed property under the Tax Code, and are therefore subject to special recordkeeping requirements to establish the business use. Companies and employees have long complained about the onerous recordkeeping requirements, and many companies simply ignore them.
Under the current rules, employees are supposed to keep a record of each call and the time it lasts, as well as its business purpose. If the calls are itemized on a monthly statement, they are supposed to be identified as personal or business, and the employee is required to retain any supporting evidence of the business calls. The employer, too, is required to maintain the records to support the exclusion of the phone use from the employees wages. The value assigned to individual personal calls must include a pro rata share of monthly service charges. The fair market value of any use that represents personal use is included in the wages of the employee.
If the extent of personal use cannot be established, the entire value of the cell phone is taxable income to the employee. Because of the volume of calls that an employee may make, as well as the variety of telephone service provider pricing systems, the recordkeeping requirement may be burdensome to employees as well as employers, the IRS acknowledged. To simplify the requirements, the IRS presented three proposals in Notice 2009-46: a minimal personal use method, a safe harbor substantiation method, and a statistical sampling method.
1. Minimal Personal Use Method: The IRS and the Treasury Department are considering two proposals that would allow an employer to consider all of an employees usage of an employer-provided cell phone as business usage. Under the first proposal, the entire amount of an employees use of an employer-provided cell phone would be deemed to be for business purposes if the employee could provide sufficient records to establish that the employee maintains and uses a personal, non-employer-provided cell phone for personal purposes during the employees 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: Under this method, an employer would treat a certain percentage of each employees 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: A third proposal would allow employers to use statistical sampling techniques to measure an employees 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 by value of each employees total usage to determine the value of personal usage. The remaining portion of the employees usage would be deemed to be for business purposes.
In addition, the IRS and the Treasury are interested in understanding the methods that employers currently use to arrive at the fair market value to an employee of an employer-provided cell phone. They are considering whether a simplified valuation method would be helpful and appropriate to determine the fair market value.