Tax and Employee Benefits Alert
Three years ago, Miller & Chevalier submitted an Industry Issue Resolution request on behalf of a client coalition asking for guidance on the tax treatment of the personal use of cellular telephones and similar telecommunications equipment. Today, President Obama is scheduled to sign H.R. 5297, the "Small Business Jobs Act of 2010," into law, which includes a provision removing such equipment from the definition of "listed property" in section 280F(d)(4)(A) of the Internal Revenue Code (the "Code"). The amendment is retroactive to taxable years beginning after December 31, 2009.
For taxpayers, it is a welcome first step. The "de-listing" of cell phones eliminates "the heightened [section 274(d)] substantiation requirements and special depreciation rules that apply to listed property." Joint Committee on Taxation, Technical Explanation of the Tax Provisions in Senate Amendment 4594 to H.R. 5297, the "Small Business Jobs Act of 2010," Scheduled for Consideration by the Senate on September 16, 2010, (JCX-47-10), September 16, 2010, at 25.
Yet, until such time that the Internal Revenue Service (the "IRS") and the Treasury Department ("Treasury") issue guidance to the contrary, the de-listing of cell phones does not eliminate the recordkeeping required under section 162 to prove business use or, said differently, de minimis personal use. Consequently, it is critical that taxpayers work immediately with the IRS and Treasury to develop practical and administrable guidance that will balance the statutory requirement to tax the value of personal fringe benefits with the appropriate level of taxation of devices that have become routine, low-cost working tools for most of us.
Specifically, if an employer (government or non-government) provides a cell phone and/or service plan to an employee (by either paying for the benefits directly or reimbursing the employee), the exclusions set forth in section 132(d) for working condition fringe benefits and in section 62(c) for tax-free expense reimbursements under the accountable plan rules apply only to the extent that records are kept to substantiate the business use each calendar year. This is required by section 162, which is at the core of these exclusions. In other words, if insufficient or no records are kept, the exclusions for working condition fringes and accountable plan reimbursements will not apply to exclude the business use of the cellular phone (and the related service plan expenses) from the employee's gross income. Therefore, the value of the benefits must be included in the employee's gross income and treated as wages for payroll tax purposes. The statutory underpinning of section 162 was not changed by the Small Business Jobs Act of 2010, so additional guidance is needed to interpret when occasional personal use of an employer-provided cell phone could be considered de minimis like the occasional personal use of an employer's copying machine. See Treas. Reg. § 1.132-6(e)(1).
In that regard, a footnote to the Joint Committee on Taxation's explanation of the cell phone provision implicitly acknowledges the relevance of section 162 by referring to the working condition fringe benefit exclusion, but also references the possibility that the personal use may be so minimal that its value could be excludable from income under the de minimis fringe benefit exclusion of section 132(e), a provision that does not require section 162 record keeping:
The provision does not affect Treasury's authority to determine the appropriate characterization of cell phones as a working condition fringe benefit under section 132(d) or that the personal use of such devices that are provided primarily for business purposes may constitute a de minimis fringe benefit, the value of which is so small as to make accounting for it administratively impracticable, under section 132(e).
Immediate clarification by the IRS and Treasury is necessary so that taxpayers will know how to design their cell phone policies so that no personal benefits arise for tax purposes. It is important to note that IRS examiners have not lost interest in the benefit, despite the Commissioner's public acknowledgement that "[t]he passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete." The taxation of cell phones even appears on the list of items to be examined under the IRS's lately announced National Research Program of 6,000 randomly selected employers. The issue continues to be raised in ongoing examinations of companies and self-employed taxpayers, and resolutions with IRS examiners range depending on the taxpayer's practices and the examiner's views on the level of personal use that is permissible.
It has long been our contention that the IRS and Treasury have the authority to develop guidance permitting employers, employees and the self-employed to rely on streamlined or safe harbor approaches for substantiating the business use of cell phones. With the de-listing of cell phones and the Joint Committee on Taxation explanation's encouragement of practical guidance, the IRS and Treasury are likely to be more willing to consider streamlined procedures and safe harbors to eliminate the requirement to document business use when there is a high level of confidence that personal use is in fact kept to a minimum. We would encourage interested parties to consider submitting comments on this important issue.
For more information, please contact:
Marianna Dyson, firstname.lastname@example.org, 202-626-5867
Marc Gerson, email@example.com, 202-626-1475