IRS asks Congress to make employer-provided cell phones excludable from income

Responding to the hue and cry from the public after the release of Notice 2009-46, Internal Revenue Service Commissioner Douglas Shulman issued a statement June 16 calling on Congress to change the law regarding employer-provided cell phones “to make clear that there will be no tax consequences to employers or employees for personal use of work-related devices such as cell phones provided by employers.”

Notice 2009-46

Notice 2009-46, which the IRS issued on June 12, proposes three optional simplified methods by which employers may “substantiate” the business use of employer-provided cell phones. To the extent the substantiation requirements are satisfied (i.e., showing that the employee used the cell phone for business purposes), the expense is deductible as a business expense of the employer, and the benefit is excludable from the employee’s income as a working condition fringe benefit. However, to the extent the substantiation requirements are not satisfied, the fair market value of the cell phone is included in the employee’s income. To meet the substantiation requirements, adequate records have to be kept.

The substantiation requirement is imposed by statute, not by Treasury or IRS regulation. Section 162(a) allows an employer deduction for business expenses, but section 274(d)(4) prohibits any deduction for “listed property” under section 280F(d) unless the taxpayer satisfies the substantiation requirements. Among the items included as “listed property” is “any cellular telephone (or other similar telecommunications equipment).” Only to the extent the substantiation requirements of section 274 are met can the employer deduct the cost of providing cell phones to its employees. On the employee side, section 132(a)(3) excludes from the employee’s gross income any “working condition fringe” benefits; however, any substantiation requirements must similarly be met for the benefit to be excludable as a working condition fringe under section 132(a).

Instead of the cumbersome substantiation requirements under section 274, Notice 2009-46 proposes three optional simplified alternatives for cell phones: a 75-percent “business use” safe harbor, a 100-percent “business use” presumption if the employee also maintains a personal cell phone, and a statistical sampling alternative. Seeking to also make it simpler to compute the amount includable in the employee’s income where an employer-provided cell phone is not used exclusively for business purposes, the IRS asked for feedback on the methodologies currently being used by employers to determine the fair market value.

The response from the public was immediate. Employers viewed the IRS as targeting their business deductions and Form W-2 reporting. Tax professionals pondered the practicalities of applying any substantiation requirements to employer-provided cell phones that now provide e-mail and Internet access. Business owners and employees scoffed at the notion of requiring employees to carry both a personal and a business cell phone in order to qualify for the 100 percent “business use” presumption. All agreed that current law, which was enacted when cell phones were expensive luxury electronics that were not widely used in the workforce but could easily be converted to personal use, is out of step with the current workforce, in which maintaining a cell phone for business use is a common job requirement and a necessary expense.

In his June 16 statement, Shulman conceded that although Notice 2009-46 would add clarity, the current law would still leave widespread confusion among employees and businesses. As a result, the IRS and Treasury Department asked “that Congress act to make clear that there will be no tax consequences to employers or employees for personal use of work-related devices such as cell phones provided by employers.”

Legislative proposal pending

House Ways and Means Committee member Sam Johnson, R-Texas, introduced legislation (H.R. 690) on January 26 that would amend section 280F(d) to delete “cellular telephone (or other similar telecommunications equipment)” from the items included as “listed property.” As a result, the substantiation requirements would no longer apply for the expense to be deductible as a business expense under section 162(a) or for the benefit to be excludable from income as a working condition fringe under section 132(a). The bill, which has over 50 co-sponsors, has been referred to the Ways and Means Committee.

— Sandra Rolitsky
     Human Capital Total Rewards
     Deloitte Consulting LLP