Paul L. Caron

Tuesday, August 5, 2008

Proposed Bill Would Allow Tax-Free Employee Cell-Phone Use

Cell_phone_3 I previously blogged Bill Would Liberalize Tax Treatment of Employer-Provided Cell Phones:

It is no secret that in many ways the Tax Code is ill-suited to the 21st Century American economy.  One small example is the tax treatment of employer-provided cell phones.  Because cell phones are treated as "listed property" under § 280F, an employer must report the value of a cell phone as income on an employee's W-2 unless the employee satisfies onerous substantiation rules.  In 2005, the IRS confirmed this tax treatment of employer-provided cell phones.  There is anecdotal evidence that IRS agents continue to raise the issue on audit, and employers are responding by no longer providing cell phones to employees and instead giving them a taxable cell phone allowance to avoid the substantiation rules.

Although these rules may have made sense when they were enacted in 1989, given cell phones' size, cost, and limited business use, they make no sense today in light of the vast changes in the size, pricing, and ubiquity of cell phones. Representative Johnson yesterday [Feb. 14, 2008] introduced H.R. 5450, the Modernize Our Bookkeeping In the Law for Employee's Cell Phone Act of 2008, which would remove cell phones from the definition of listed property in § 280F(d)(4).  [See also S. 2668.]

The L.A. Times reports on this issue in Are Cell Phones a Fringe Benefit? Lawmakers Push for Change in Logging Use of Work-Issued Device, by Jim Puzzanghera:

Small, inexpensive cell phones have become ubiquitous in the workplace. But federal tax rules governing them date to the days of big handsets, big bills and big hair.

Major employers have been hit with bills for hundreds of thousands of dollars in back taxes for violating the anachronistic laws. If the rules aren't changed, some employers say they will stop handing out cell phones to their workers. ...

The IRS still considers cell phones expensive fringe benefits and has started enforcing regulations from 1989. That's when Congress decided that mobile phones should be treated like company cars and other executive perks: Their personal use qualifies as extra compensation.

The law said employees must keep detailed records of all calls made on work-issued cell phones, indicating if they were business or personal. If they don't, the phone and wireless service count as a perk that must be listed as taxable income. ...

[T]he wireless industry contends that changing the rule is a matter of fairness. No similar rules govern calls made on landlines, said Jot Carpenter, vice president of government affairs for CTIA-The Wireless Association, an industry trade group. "A wireless device is not a perk—it's a critical tool," he said. "If somebody's making a personal call and you're under your bucket of minutes or you're making it at night or on the weekends, what's your cost? I would argue the cost of a free minute should be nothing."

Most employers were unaware of the cell phone rules until the past few years, when the IRS began requiring additional taxes to cover the value of the cell phone service provided to employees. The University of California, Los Angeles, for example, was hit with a $239,196 bill this year after IRS auditors found that employees with cell phones were not keeping logs. The University of California, San Diego had to shell out $186,471 for the same reason. ...

The UC system is considering halting its practice of issuing cell phones for most employees. Instead, universities would give them monthly stipends to buy handsets and service. The stipends would be taxable, however, so employees would have to pay out of their pockets for phone service that they once got for free as part of their jobs.

UC has put the proposed changes on hold as Congress considers removing cell phones from the IRS list of fringe benefits.

Reps. Sam Johnson (R-Texas) and Earl Pomeroy (D-N.D.) sponsored legislation to remove cell phones from the list. It passed the House this year, and a similar bill, sponsored by Sens. John Kerry (D-Mass.) and John Ensign (R-Nev.) is pending in the Senate.

The cell phone tax law was set "back in 1989 when cell phones were huge, and when it cost a lot of money to make a phone call. Nowadays, they're a dime a dozen and the cost is way down," Johnson said. "If you don't log all your telephone calls, you're going to have some IRS weenie after you. That's why we're trying to get the law changed—because it just doesn't make any sense any more."

(Hat Tip: Tax Girl.)

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» Employer Provided Cell Phones As Taxable Income from Adjunct Law Prof Blog
TaxProf Blog ran a very interesting August 5, 2008 posting entitled Proposed Bill Would Allow Tax-Free Employee Cell-Phone Use. Prof. Caron reports that cell phones provided by employers are generally taxable. Therefore, the Tax Code encourages employe... [Read More]

Tracked on Aug 5, 2008 9:32:53 PM

» THE STONE-A-PHONE TAX from Roth & Company, P.C.
News reports say that the IRS is enforcing the widely-ignored rules governing employee cell phones. The rules, which date back... [Read More]

Tracked on Aug 6, 2008 6:24:28 AM