Update: The IRS on June 16th issued a statement by Commissioner Shulman requesting that Congress take steps to repeal the provisions that cause this to be taxable income to employees, repealing the underlying provision that classified cellular telephones as “listed property” under §274(d). The statement notes “The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete.”
In Notice 2009-46, the IRS has requested comments on proposals to provide some relief to the requirements found in §274(d) that employees maintain “contemporaneous records” of employer provided cellular telephones for any part of the value of the telephones to be excluded from the employee’s income.
The IRS points out that §274(d)(4)(A)(v) makes a cellular telephone, or any similar telecommunications equipment, listed property, triggering the recordkeeping requirements found in Reg. §1.274-5T(b)(6) that records must be keep to prove the amount, time and business purpose of usage of the item, or the deduction is disallowed under Reg. §1.274-5T(a). Reg. §1.132-5(a)(1)(ii) provides that such records must exist for the working condition fringe of providing the phone to be excluded from income.
The notice advances four possible simplifying recordkeeping rules for employers providing cell phones. However, the notice makes clear that these simplified rules will not apply until the IRS publishes additional guidance on these matters, so employers cannot begin immediately using these exceptions.
The provisions being contemplated include the following:
- Minimal Personal Use Method: Under this method, employers would provide phones under a policy that prohibited all but de minimus personal use. The IRS suggests either requiring that the employee provide documentation showing that the employee maintains a separate, personally paid for cell phone for nonbusiness use or establishing some form of definition of “mininmal” use that might be defined by a specified number of minutes.
- Safe Harbor Substantiation Method: Under this method, the employer would be permitted to simply use a fixed percentage (in the proposal, 75%) of use as business use, with the remaining percentage being deemed personal.
- Statistical Sampling Method: Under this method the employer would use a statistical sampling method similar to that provided for in Rev. Proc. 2004-29, which involved amounts of meal and entertainment expenses not subject to 50% disallowance under §274(n)(2)(A), (B), (C), (D) or (E) to determine a business use percentage to be used for all employees.
- Simplified Fair Value Determination: The IRS points out that an employer’s cost to provide a cell phone is not necessarily determinative of the fair value of the benefit provided to the employee, so the IRS is seeking comment on what method employers are using today to value the personal use benefit and whether there would be a benefit to simplified valuation method to be provided for in future guidance.
The IRS is asking for comments to be submitted in writing on or before September 4, 2009.