Updated 04-13-2010 It is being reported that the U.S. House has scheduled for April 15th consideration of the Taxpayer Assistance Act of 2010. The bill’s major provision would remove cell phones and similar telecommunications devices as listed property, effective for tax years beginning after 2009.
Ways and Mean member John Lewis (D-GA) was expected to introduce the bill. It would include several individual taxpayer assistance measures. As offsets to the bill’s cost of $411 million, it would expand the bad-check penalty to electronic payments and increase information return penalties.
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By 2013 mobile phones will overtake PCs as the most common Web access device worldwide according to Gartner forecasts. The IT research firm says the total number of PCs in use will reach 1.78 billion in 2013. By 2013, the combined installed base of smartphones and browser-equipped enhanced phones will exceed 1.82 billion units. These devices will be greater than the installed base for PCs afterward.
Despite these projections, the U.S. Internal Revenue Service (IRS) continues to treat mobile phones as a luxury. According to an article on Mobile Enterprise, since 1989 IRS tax regulations have identified the cellphone as “listed property.” A listed property is an item obtained for use in a business but designated by the tax code as lending themselves easily to personal use.
Tax policy
According to the IRS, “unless the employer has a policy requiring employees to keep records, or the employee does not keep records, the value of the use of the phone will be income to the employee.” The IRS goes on to say, “At a minimum, the employee should keep a record of each call and its business purpose. If calls are itemized on a monthly statement, they should be identified as personal or business and the employee should retain any supporting evidence of the business calls. This information should be submitted to the employer, who must maintain these records to support the exclusion of the phone use from the employee’s wages.”
On the other hand, if the phone is employee-owned there are different tax rules. The IRS says “the listed property requirements do not apply. Any amounts the employer reimburses the employee for business use of the employee’s own phone may be excludable from wages if the employee accounts for the expense under the accountable plan rules.”
In June 2009 the IRS proposed to tax up to one-quarter of an employee’s use of a work cellphone. However, the IRS has since decided to let Congress handle the matter. IRS Commissioner Doug Shulman announced on January 8, 2010, the IRS is now taking a “wait-and-see” attitude. The policy leaves its current regulations in place until Congress passes new legislation. Shulman said on the C-Span’s “Newsmaker” program: “We’re quite hopeful Congress is going to act on this. In the meantime, we’re not doing anything special or moving forward with any initiatives. Our hope is that there will be legislation to clean this up.”
Senator John Kerry (D-MA) sponsored the Modernize Our Bookkeeping In the Law for Employees – Mobile Cell Phone Act of 2009, (S. 144/H.R. 690). The bill would remove mobile devices from the listed property rule to exempt them from the tax. The House approved the bill during the last Congress but is still in committee in the current session.
CTIA response
The Cellular Telecommunications & Internet Association (CTIA) trade association welcomed the news. In a Jan. 11, 2010, prepared statement CTIA President Steve Largent said, “The existing rule is an anachronism and it can’t be saved simply by giving it a facelift. That’s why we are focused on continuing to secure congressional support for the Mobile Cell Phone Act, which enjoys broad bipartisan support on both sides of the Capitol. It is our hope that Congress act soon to help employers and employees alike by repealing this absurd, outdated rule.” According to CTIA, employees are still required to maintain logs detailing their business use on a mobile device. The IRS expects individuals to record the following items, according to the CTIA:
- the amount of such expense or other items,
- the time and place of the use of the property,
- the business purpose of the expense, and
- the business relationship to the taxpayer of the persons using the property.
The results of the stalled legislation have been predictable. The article cites the example of Rocky Mount, VA, which stopped issuing cellphones to employees. Town employees whose job requires 24×7 availability via cell phone are required to buy their own phone. They will be given a flat stipend for using the phone for work purposes. If employees do not keep careful records, despite paying for their own cellphones for business purposes they may not be able to claim the service as a business deduction. The article notes that “For a for-profit business, the designation of an item as ‘listed property’ has implications for depreciation deductions taken by the business and the computation of net income.”
How to comply with existing tax rules
To comply with existing tax rules, Thompson’s Employer’s Guide to Fringe Benefits Rules says employers must satisfy the onerous substantiation requirements. They do this by requiring annotated monthly statements from employees to support deductions and employee income exclusions. Or firms must treat the value of the benefits as wages for Federal employment tax purposes and report this value as wages on Forms W-2.
For practical reasons, Thompson says, some employers opt to reimburse employees for cell phone purchases on an after-tax basis. This would negate the employer’s ownership of the phones and the requisite fixed asset tracking that follows. Employers should also provide reimbursements of service and usage fees on an after-tax basis unless they collect annotated documentation from employees to substantiate the reimbursements. Employers should either collect all monthly statements from employees. Otherwise, they should require employees to maintain those records to effectively respond if the IRS inquires into the claims.
What should a firm do if they provide employees with cellphones?
- Assess your existing policies for corporate-issued smartphones, and require employees to keep records of each call and its business purpose.
- Regularly audit smartphone records and require employees to reimburse the company for all personal use.
- Consider whether an individual-liable model for the cellphone users in your enterprise would work.
- Get involved and contact your Senator or Representative and tell them to update the IRS code.
Ralph Bach has been in IT long enough to know better and has blogged from his Bach Seat about IT, careers, and anything else that catches his attention since 2005. You can follow him on LinkedIn, Facebook, and Twitter. Email the Bach Seat here.
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