IRS Proposed Rules to Substantiate Business Use of Employer-Provided Cell Phones

United States fast-paced business environment prompts employers to provide telecommunication devices to employees so they can achieve business' goals.  The Internal Revenue Code (IRC) allows employers to deduct expenses associated with business use of telecommunication devices, including cell phones.  Yet, currently, these deductions must be substantiated under complex Internal Revenue Service (IRS) rules. On June 8, 2009, the IRS published a public notice proposing simplified rules to substantiate business use of employer-provided cell phones, and inviting public comments. This article provides information on these proposed rules.

The IRC § 162(a) allows deductions for ordinary and necessary expenses incurred in carrying on any trade or business.  Yet, IRC § 262 does not allow deductions related to personal, living, or family expenses, the June-8-notice states.  Also, the notice says that IRC § 274 allows deductions for listed property provided that taxpayer substantiates these deductions.  Cell phones and any other telecommunication devices are considered listed property under the IRC.  Cell phones are considered "fringe benefits" under the IRC listed property items, and they may not be regarded as part of the employee"s gross income when they constitute a "working condition fringe." In other words, employers may deduct employee's business use of cell phones as working conditions fringe, instead of including them as employees' fringe benefits. Employers, however, would need to substantiate deductions of working conditions fringe under current complex rules. Three are the tests that include the proposed IRS rules to substantiate deductions of employer-provided cell phones (as working condition fringe).

The first test is called Minimal Personal Use Method. This test includes two proposals to consider employer-provided cell phones as business usage: (1) the entire amount of the employee's use of the employer-provided cell phone would be considered for business purposes if the employee can state and prove with sufficient records that the employee maintains and uses a personal (non-employer provided) cell phone for personal purposes during the employee's work hours; (2) an amount of minimal personal use would be defined to disregard it from the employer-provided cell phone.  For example, the notice says, "'minimal' could be defined by reference to a particular number of minutes of use or for certain personal purposes."

The second test is called the Safe Harbor Substantiation Method.  Under this method, the employer may consider certain percentage of the employee's use of an employer-provided cell phone as business usage.  The remaining amount of use would be considered personal. The IRS proposed a business use percentage of 75% percent.

The third test is called the Statistical Sample Method.  This method proposes statistical sampling techniques to measure employee's personal use of employer-provided cell phone. The employer would multiply the percentage time value of each employee's total usage to determine the value of personal usage. The remaining amount of the employee's usage would be deemed for business purposes.

The IRS is expected public comments on these three test methods; specifically, the IRS wants answers to the following questions:

1.      "The specific provisions that should be required to be included in an employer's written policy prohibiting personal use of employer-provided cell phones;

2.       The types of employee records sufficient to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for purposes of the first proposed minimum personal use method contained in this notice;

3.       How to define a specified amount or type of "minimal" personal use (e.g., a maximum number of minutes of use or a list of acceptable personal uses) that should be disregarded in determining the amount of personal use of an employer-provided cell phone for purposes of the second proposed minimum personal use method contained in this notice.

4.       The business use percentage that should be applied in the proposed safe harbor substantiation method contained in this notice and the data and rationale upon which it is based;

5.       The methods currently used by employers to determine the fair market value of an employee's use of an employer-provided cell phone; and

6.       Whether a simplified method of determining the fair market value 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."

 

Comments may be sent before September 4, 2009, IRS, attn: CC:PA:LPD:PR (Notice 2009-46), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

 

 The first method could be a great solution for large corporations. Yet, for small businesses and one proprietor businesses, the second method may be more advantageous.  Small companies may use just one cell phone for business purposes and for personal use.  This method is a clear rule on the percentage that would be allowed for deductions.  The third method does not seem very practical and may be too complex to apply for both large corporations with several executives using employer-provided cell phones, and for small businesses that do not need these complex rules.