The IRS is finally poised to impose new tax rules concerning the personal use of employer-owned cell phones.
Alert: Technically, employers are required to account for use of cell phones by employees. However, few do because of the logistics. New IRS proposals simplify the process, but could result in taxable income for many employees. (IRS Notice 2009-46)
The problem stems from the tax treatment of “listed property” acquired for business use but also used personally. It includes automobiles, computers and entertainment or recreation-related items. In 1989, cell phones were added to this category.
Basic rules: If an employer-owned cell phone is used exclusively for business, the entire use is excluded from taxable income as a working-condition . Otherwise, the amount representing personal use must be included in the employee’s wages. This includes costs attributable to personal calls as well as a pro rata share of monthly service charges.
At a minimum, employees should keep a record of each call and its purpose. If calls are itemized on a monthly statement, they should be identified as personal or business calls. Employees should also retain any supporting evidence of business calls. If business use is not established through these records, the entire value of the cell phone use is taxable to the employee.
In the new Notice, the IRS proposed three new methods that would bring the rules up-to-date.
1. Minimal personal-use method. The entire amount of an employee’s use of an employer-provided cell phone is treated as business use if the employee can establish he or she uses a private cell phone for personal reasons during the employee’s work hours. Alternatively, minimal personal use would be disregarded.
2. Safe-harbor 75% method. The employer treats 75% of each employee’s use of an employer-provided cell phone as business use. The remaining 25% is considered personal use.
3. Statistical sampling method. Employers use statistical sampling techniques to measure an employee’s personal use of an employer-provided cell phone.
Tip: The IRS is still weighing its options. Expect them to make the call soon.
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