The recent congressional debate on smartphone taxation goes on and we hope that it gets passed soon.
Meanwhile, the Internal Revenue Service has dropped its recommendation that one quarter of business
cell phone usage be taxable because this is their estimateof personal usage that goes on within businesses. IRS Commissioner DougShulman announced on January 8, 2010, that the agency would wait for Congress to pass legislation onthe issue.
There is an excellent article this month in Blackberry Central written by Susan Nunziata regarding the latest tax implications. In the article, She advises that the tax issue from the IRS on personal cell phones
continues and is far from settled. She gives some excellent real life examples and court rulings regarding how some companies and their employees are still being held accountable by the IRS for personal use of cell phones. The IRS rules are being misinterpreted and misapplied by some business organizations out there.
I wholeheartedly agree with her findings. From a professional telecommunications audit perspective, note that there are a lot of companies that don’t have a cell phone policy or enforce the use of business calls only for their employees (which would satisfy most IRS requirements on business use of cell phones).
Basically, the IRS wants individuals who use business cell phones for personal use to be to be taxed as a part of their income for personal use. They also want businesses to not claim those smart phones for depreciation and business use purposes. Congress wants consumers to have an easier time of managing the expense and make the taxation piece fair and easier to understand.
Nunziata’s article has some great points and goes on to discuss and illustrate the rules of employing cell phones at your company as follows:
1. Assess your existing policies for corporate issued smartphones, and require your employees to keep records of each call and its business purpose.
2. regularly audit smartphone records and require employees to reimburse your company for all personal use.
3. Consider whether an individual liable model is appropriate for the cell phone users in your company.
Again, I believe that most businesses are not doing this and are either unaware of the rule, or choose to ignore it! Nevertheless, we hope Congress is successful in making the IRS smart phone policy easier to adhere to and understand.
You can save money with a business cell phone bill audit or a cell phone policy written for your company. Contact the telecom audit pros at BottaBoom today or call 1-888-487-5326 for a free telephone bill audit review. If we find no telecom refunds or recurring savings, you owe us nothing!
About the author: You can learn more about this author at this link: Telecom Audit Professional
Tags: cell phone bill audit, Telecom Audit, telecommunications audit
January 27th, 2010 at 11:35 am
Mark,
Perhaps your followers will find this useful…
Detailed Analysis of Cell Phone Fringe Benefit Issue
Is cell phone “listed property”?
Yes, see IRC Section 280F (d) (4) (A) (v).
Sec. 280F Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes
(d) Definitions and special rules
For purposes of this section -
(4) Listed property
(A) In general
Except as provided in subparagraph (B), the term “listed property” means -
(i) any passenger automobile,
(ii) any other property used as a means of transportation,
(iii) any property of a type generally used for purposes of entertainment, recreation, or amusement,
(iv) any computer or peripheral equipment (as defined in section 1 68(i)(2)(B)),
(v) any cellular telephone (or other similar telecommunications equipment), and
(vi) any other property of a type specified by the Secretary by regulations.
Does IRS impose detailed record keeping requirements on “listed property”?
Yes, see IRC Section 274(d) (4).
The designation of listed property has implication for both business deduction (non-applicable in 501(c) (3) entities) and fringe benefits purposes because of detailed recordkeeping with respect to such property.
Sec. 274. Disallowance of certain entertainment, etc., expenses
(d) Substantiation required
No deduction or credit shall be allowed -
(4) with respect to any listed property (as defined in section 280F(d)(4)), unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment,
amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i)).
See also Treasury Reg 1 .274-5T (b) (6)
Sec. 1 .274-5T Substantiation requirements (temporary).
(b) Elements of an expenditure or use–(1) In general. Section 274(d) and this section contemplate that no deduction or credit shall be allowed for travel, entertainment, a gift, or with respect to listed property unless the taxpayer substantiates the requisite elements of each expenditure or use as set forth in this paragraph (b).
(6) Listed property. The elements to be proved with respect to any listed property are–
(i) Amount—
(A) Expenditures. The amount of each separate expenditure with respect to an item of listed property, such as the cost of acquisition, the cost of capital improvements, lease payments, the cost of maintenance and repairs, or other expenditures, and
(B) Uses. The amount of each business/investment use (as defined in Sec. 1 .280F-6T (d)(3) and (e)), based on the appropriate measure (i.e., mileage for automobiles and other means of transportation and time for other listed property, unless the Commissioner approves an alternative method), and the total use of the listed property for the taxable period.
(ii) Time. Date of the expenditure or use with respect to listed property, and
(iii) Business or investment purpose. The business purpose for an expenditure or use with respect to any listed property (see Sec. 1.274-
5T(c)(6)(i) (B) and (C) for special rules for the aggregation of expenditures and business use and Sec. 1 .280F-6T(d)(2) for the distinction between qualified business use and business/investment use).
What fringe benefit safe harbor excludes the value of the business use of listed property from an employee’s gross income?
The safe harbor resides with working condition fringe benefit exclusion of IRC Section 132(d) along with “accountable plan” rules of IRC Section 62(c).
If an employer provides a cell phone and service plan to an employee, by either paying for the benefits directly or reimbursing the employee, the exclusions set forth in 132(d) and 62(c) apply only if the recordkeeping substantiates the business use each calendar year.
Sec. 132. Certain fringe benefits
(d)Working condition fringe defined
For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.
Sec. 62. Adjusted gross income defined
(c) Certain arrangements not treated as reimbursement arrangements For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if -
(1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or
(2) such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement. The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.
Will insufficient record keeping result in taxation?
Yes, if insufficient or no records are kept, the exclusion for working condition fringe benefit and accountable plan reimbursements will not apply to exclude the business use of the cell phone.
See Treasury Reg 1 .274-5T(e).
Sec. 1 .274-5T Substantiation requirements (temporary).
(e) Substantiation of the business use of listed property made available by an employer for use by an employee–(1) Employee–(i) In general. An employee may not exclude from gross income as a working condition fringe any amount of the value of the availability of listed property provided by an employer to the employee, unless the employee substantiates for the period of availability the amount of the exclusion in accordance with the requirements of section 274(d) and either this section or Sec. 1 .274-6T.
Can employer adopt a “no personal use” policy with respect the cell phones?
No, this type of policy only applies to vehicles.
See Treasury Reg 1 .274-6T(a)(2)
Sec. 1 .274-6T Substantiation with respect to certain types of listed property for taxable years beginning after 1985 (temporary).
(a) Written policy statements as to vehicles–(1) In general. Two types of written policy statements satisfying the conditions described in paragraph (a)(2) and (3) of this section, if initiated and kept by an employer to implement a policy of no personal use, or no personal use except for commuting, of a vehicle provided by the employer, qualify as sufficient evidence corroborating the taxpayer’s own statement and
therefore will satisfy the employer’s substantiation requirements under section 274(d). Therefore, the employee need not keep a separate set of records for purposes of the employer’s substantiation requirements under
section 274(d) with respect to use of a vehicle satisfying these written policy statement rules. A written policy statement adopted by a governmental unit as to employee use of its vehicles is eligible for these exceptions to the section 274(d) substantiation rules. Thus, a resolution of a city council or a provision of state law or a state
constitution would qualify as a written policy statement, as long as the conditions described in paragraph (a)(2) and (3) of this section are met.
(2) Vehicles not used for personal purposes–(i) Employers. A policy statement that prohibits personal use by an employee satisfies an employer’s substantiation requirements under section 274(d) if all the
following conditions are met–
(A) The vehicle is owned or leased by the employer and is provided to one or more employees for use in connection with the employer’s trade or business,
(B) When the vehicle is not used in the employer’s trade or business, it is kept on the employer’s business premises, unless it is temporarily located elsewhere, for example, for maintenance or because of a mechanical failure,
(C) No employee using the vehicle lives at the employer’s business premises,
(D) Under a written policy of the employer, neither an employee, nor any individual whose use would be taxable to the employee, may use the vehicle for personal purposes, except for de minimis personal use (such as a stop for lunch between two business deliveries), and (E) The employer reasonably believes that, except for de minimis use, neither the employee, nor any individual whose use would be taxable to the employee, uses the vehicle for any personal purpose.
Is sampling permitted?
The regulations permit employers to substantiate the business use of a cellular phone by maintaining adequate records for a portion of the tax year. By utilizing a “sampling” method, the Enterprise would have to collect the records pertaining to the sampling period and also be prepared to demonstrate that the records pertaining to the sampling period are representative of the use for the entire calendar year.
See Treasury Reg 1.274-5T(c)(3)(ii).
Sec. 1 .274-5T Substantiation requirements (temporary).
taxable year and use that record to substantiate the business/investment use of listed property for all or a portion of the taxable year if the taxpayer can demonstrate by other evidence that the periods for which an adequate record is maintained are representative of the use for the taxable year or a portion thereof.
Jerry Thomas
Jerry@Telecommunicationauditor.com
http://www.telecommunicationauditor.com
January 27th, 2010 at 10:46 pm
Jerry, Thank you for the excellent information on Detailed Analysis of Cell Phone Fringe Benefit Issue. I’ve posted it for my readers accordingly and I believe that many will find it quite useful.