Personal calls on your employer's cell phone? New tax rules may soon apply

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Editor's Note: In the days since this article was written, the IRS has reversed its position on taxation of personal use of a business cell phone and has asked Congress for permission to stop treating cellular phones as listed property.

It's not a new idea... taxing the personal use of a business cell phone. Actually it's a law that has been around for two decades and it permits businesses that provide employees with cell phones to treat an employee's personal use of that phone as a taxable fringe benefit. At the time the law was passed in 1989 cell phones themselves were more expensive than they are today and so were calls. These days, with phones everywhere and unlimited call plans easily accessible, the rules need a facelift.

The rules as they are now

Cell phones are considered "listed property" that may easily be subject to personal use. So businesses that wish to deduct the cost of cell phones have to abide by cumbersome substantiation rules, according to the existing law. That means employees are expected to keep a record of each call, the time it was made or received, and the business purpose if applicable. Supporting documentation must be kept and submitted to the employer. The employer then must then calculate the personal use amount, along with a pro rata share of service charges. That amount is then included in the employee's wages. If the personal use percentage can't be determined, the entire value of the cell phone for that period is deemed taxable income.

Possible changes

Because cell phones are still considered listed property, any changes that are made must still include substantiation to prove the business and personal use. But the IRS is considering making the rules less cumbersome to better reflect the way we use cell phones today. An unnamed IRS official told reporters the IRS is proposing a plan that will "reduce how much employers have to spend trying to comply with the tax law."

A bill to repeal the existing law almost passed last year, but not quite. This year, Senator John Ensign (R-NV) and Senator John Kerry (D-MA) are trying it again with a similar bill.

In addition, a number of industry associations have sent letters to Capitol Hill, arguing that the tracking requirements expected of businesses are too big a burden to be worthwhile.

IRS Notice 2009-46 puts forward three options for simplifying the accounting for cell phone use, for which they seek comment on or before September 4, 2009.

  • Minimal personal use method. Under this plan, 75 percent of work-cell phone use would be considered business, and the remaining 25 percent, personal. For an individual in the 35% tax bracket, with a $500 cell phone bill, the tax on 25% of that bill would amount to $43.75
  • Safe harbor substantiation method. This method allows employees to provide proof that they supply their own personal cell phones during working hours so that there is no question of personal use of the employer's phone.
  • Statistical sampling method. This method lets employers determine personal use by figuring the average personal use for all employees.

As of this month, the tax agency is seeking public comment on how to best revamp the current system so that it makes sense.

You can read more information on the taxability of employee cell phones.

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