IRS Proposes New Cell-Phone Fringe Benefit Substantiation Rules

Employer-provided cell phones have gone from an exclusive perk to common equipment in the 20 years since Congress made them subject to strict substantiation requirements for business use. Monday, the IRS proposed simplifying those rules.

Generally, employees must include in income the fair market value of fringe benefits provided by their employer, to the extent the value of the fringe benefit exceeds the amount the employee paid for the benefit plus the amount specifically excluded from income by the Code. Under IRC § 132(a)(3), employees may exclude the fair market value of cell phone use from income as a “working condition” fringe benefit, but only to the extent that, if the employee had paid for the cell phone use, the payment would be deductible under section 162 (trade or business expenses) or 167 (depreciable property).

The Code defines cell phones as “listed property” (IRC § 280F(d)(4)). Under section 274(d)(4), employers are not allowed a deduction for listed property expenses unless the employer can adequately substantiate the amount, use and business purpose of the expense. The same substantiation requirements apply to excluding from the employee’s income the value of the phone as a working condition fringe benefit.

In Notice 2009-46, the Service requested comments on three new proposed methods that would simplify the substantiation requirements for employee use of employer-provided cell phones. All would require that employers maintain a written policy prohibiting more than minimal personal phone use. The methods are:

Minimal Personal Use Method

Two proposals under this method would allow an employer to deem as business use all employee use of a cell phone:

1. The entire amount of an employee’s use of the employer-provided cell phone would be deemed to be for business purposes if the employee also had his or her own personal cell phone and could provide records showing the personal cell phone is used for personal calls during work hours; or
2. An as-yet-unspecified minimal amount of personal use would be disregarded in determining the amount of personal use of an employer-provided phone.

Safe Harbor Method

The employer could treat a cell phone issued to an employee as used 75% for business and 25% for personal uses.

Statistical Sampling Method

The employer could use an approved statistical sampling method to determine the percentage of personal use.

The Service is open to other suggested methods and is requesting comments on the proposed methods, including the following particular issues:

• Provisions in an employer’s written policy governing use of employer-provided cell phones.
• The types of employee records sufficient to establish that the employee maintains and uses his or her own cell phone for the first proposal of the minimal personal use proposed method.
• How to define the amount and type of personal use that should be disregarded under the second minimal-personal-use proposal.
• Any other appropriate ratio of business use to personal use for the safe harbor method.
• Methods currently used for determining fair market value of cell phone use.

Comments should be submitted in writing by mail, hand delivery, or e-mail to notice.comments@irscounsel.treas.gov and should refer to Notice 2009-46. The comment deadline is Sept. 4.