IRS Provides Record keeping Relief for Cell Phones
The Internal Revenue Service recently announced that employers can provide cell phones to their employees as an excluder fringe benefit and that record keeping of the business use will not be required to receive this tax free treatment effective for tax years beginning after December 31, 2009. Additionally, reimbursements for business use of personal cell phones can also qualify for tax free treatment. The tax free treatment of cell phones and the elimination of the onerous record keeping requirements is good news for both employers and employees. Employers who reported cell phone use as taxable income to their employees may wish to consider issuing amended Forms W-2 for 2010.
When an employer pays the costs of a cell phone used by an employee, the employee receives a fringe benefit. The fair market value of the business use of that phone qualifies as an exclude-able working condition fringe benefit under Internal Revenue Code (IRC) Section 132(d) and is deductible by the employer. However, the business had been required to use some record keeping method that distinguished the business use of the cell phone from the personal use to comply with the substantiation requirements. Although the use of an employer's desktop phone to make local personal calls has long been considered a tax free de-minimise fringe benefit under IRC Section 132(e), the rules that applied to cell phones were more complicated because, according to IRC Section 280F (d), cell phones were considered "listed property" that had to comply with strict substantiation rules. According to IRC Section 274(d), the taxpayer was required to substantiate the amount and date of each qualified use, the total use for the taxable period, and the business purpose. Thus, documentation was required for both business and personal use of employer provided cell phones, and the personal use was a taxable benefit. If the extent of personal use could not be established, the entire value of the cell phone was taxable income to the employee. Many companies that attempted to comply with the record keeping rules required employees to go through their monthly cell phone bills highlighting personal calls, a process that could be very time consuming. The employer then determined the value of those personal calls and added it to the employee's Form W-2, more details.
However, determining the value of those calls was sometimes a difficult process as well because the employer's cost to provide the cell phone did not determine the fair market value of the benefit received by the employee. Regulation Section 1.61-21(b) (2) states that the fair market value of a fringe benefit is the amount an individual would need to pay for that benefit in an arm's length transaction. When the IRS audited companies that did not report the personal use of cell phones as a taxable fringe benefit, this usually resulted in an assessment of additional taxes. For some corporations, the proposed audit adjustments amounted to several hundred thousand dollars. In 2009, the IRS attempted to simplify procedures for substantiating employees business use of employer provided cell phones when it issued Notice 2009-45 proposing three methods businesses could elect to phone is provided to promote the morale or goodwill of an employee, to attract a prospective employee, or as a means of furnishing additional compensation to an employee, then it is not provided for a non compensatory business purpose and will be taxable.
Although the new IRS guidance provides a taxpayer friendly policy for use of employer provided cell phones, it applies only when the cell phone is used for a non compensatory business reason. Corporations should consider issuing a written company policy stating that cell phones will only be provided (and cell phone expense reimbursements will only be made) to employees who work in the type of job that requires a cell phone to perform their duties. This new IRS policy applies retroactively to tax years beginning after December 31, 2009. Employers may consider issuing amended W-2 Forms to employees who were taxed on their personal use of cell phones for 2010, but they are not required to do so. An employer that chooses to not issue amended W-2 Forms for 2010 will still be in compliance with the tax law because there is no requirement that an employer treat business use of cell phones as a tax free benefit. So businesses may wish to ask their employees if they want to amend their individual tax returns before going through the time and expense of issuing amended W-2 Forms, click here.
Sources: 1. Unlocked Phones 2. Cellphones Unlocked 3. Unlocked Mobile Phones