In Notice 2009-46, the IRS requests comments from the public regarding several proposals to simplify the rules by which an employer may substantiate an employee’s business use of an employer-provided cell phone. Generally, when business use is substantiated, the employer can deduct the cost of the cell phone, and can also provide the cell phones to employees tax-free.
More specifically, when an employer acquires and provides a cell phone to an employee, and the employer pays the costs of acquiring and using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the cell phone for business purposes and the business use is substantiated (in accordance with Section 274(d) of the Internal Revenue Code (the “Code”), the value of such use qualifies as a working condition fringe benefit (under Section 132(d) of the Code) and is excludable from the employee’s gross income. Also, the costs of acquiring and using the cell phone are deductible by the employer (under Section 162 of the Code). However, to the extent that the employee uses the cell phone for personal purposes, or to the extent that the business use is not substantiated, the value of such use is includable in the employee’s gross income, and the related acquisition and use costs are not deductible by the employer.
To simplify the substantiation requirements as to business use of employer-provided cell phones-so that the employee can use the cell phone tax-free while the employer can deduct acquisition and use costs-the IRS is considering, and is requesting comments on, three alternative methods of substantiation.
Under the first method, called the “minimal personal use method”, the employer may treat all of the employee’s use of the cell phone as being business use, and this treatment will automatically meet the substantiation requirement, provided that the employee can furnish the employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee’s work hours. As a variant, the employer may define a specified amount or type of “minimal” personal use (e.g., a particular number of minutes) that would be disregarded in determining the amount of business use of an employer-provided cell phone.
Under the second method, called the “safe harbor substantiation method”, the employer would treat a certain percentage of the employee’s use of the cell phone (e.g., 75%) as business use, and this treatment will automatically meet the substantiation requirement. The remaining percentage of use would be treated as personal.
Under the third method, called the “statistical sampling method”, the employer would use statistical sampling techniques to measure an employee’s business use of the cell phone. In general, an employer could use a statistical sampling method similar to that provided in Rev. Proc. 2004-29, 2004-1 C.B. 918. The result of the sampling will be deemed to meet the substantiation requirement.
The IRS is also requesting suggestions for other methods to substantiate the business use of employer-provided cell phones. The IRS points out that an employer’s use of which ever substantiation method the IRS selects in this process will be optional. An employer may use any other method of substantiation which satisfies Section 274(d). However, the IRS contemplates that any employer using another method of substantiation will have to implement a written policy which requires employees to carry and use the employer-provided cell phones in connection with the employer’s trade or business, and which prohibits personal use of the cell phones, except for minimal personal use. Further, the employer must reasonably believe that the cell phone is not being used for personal purposes, except for such minimal personal use.
Comments and suggestions submitted in response to Notice 2009-46 should be made in writing and sent to the IRS on or before September 4, 2009. The Internal Revenue Bulletin containing the Notice is here.