In early June, the IRS issued Notice 2009-46, in which it requests comments from employers with respect to proposed changes in the rules for taxing the personal use of cell phones and similar devices. Under current rules, Internal Revenue Code § § 132 and 280(f), business use of the phone may be excluded as a working condition fringe benefit if strict recordkeeping (substantiation) requirements are satisfied. Personal use is taxed as wages subject to payroll tax withholding and W-2 reporting. As with the case of personal use of company provided automobiles, logs tracking personal and business minutes (as opposed to miles) would technically be required in order to allocate the personal versus business use.
Due to the impracticality and difficulty of complying with the current substantiation requirements, the IRS is considering adopting three possible alternative methods for imputing the taxable value of personal and cell phone use. The three methods are:
- Statistical sampling. Employees’ personal use would be measured over a certain period and that percentage would be applied to total use.
- Safe harbor. This method would allow the employer to impute 25% of the employee’s use of an employer provided cell phone as personal use subject to W-2 reporting and withholding taxes.
- Minimal personal use method. If the employee can establish that he or she maintains a separate personal non-employer provided cell phone for personal use during the employee’s workday and that the business cell phone is substantially all for business use, the employer would not be required to impute any personal use for the business phone.
As mentioned above, the IRS is seeking comments on each of the three proposed methods and other alternatives. In addition to the specific requirements of the three proposed alternative methods, the IRS is interested in what methods employers are currently using to determine the fair market value of an employee’s use of employer provided cell phones. The regulations specify that allocation of the employer’s cost as opposed to the value to the employee is not an acceptable method. The purpose of the proposed rules is to simplify compliance, according to an IRS spokesperson.
The IRS has also requested that Congress repeal the tax code provision that requires the special substantiation of cell phone usage. If Congress makes such a change, the IRS may not need to promulgate alternative methods of substantiation.