As debate rages on over the benefits and drawbacks of managing corporate-liable and individual liable smartphones in the enterprise, the tax implications should not be overlooked.
After weighing changes to its policy in 2009, the U.S. Internal Revenue Service is now taking a "wait-and-see" attitude that leaves its current regulations in place until Congress passes new legislation.
Meanwhile, the existing regulation is causing consternation, particularly among government agencies that rely on employee use of mobile devices.
Since 1989, IRS regulation has identified the cellphone as "listed property," a category that includes items obtained for use in a business but designated by the Internal Revenue Code as lending themselves easily to personal use.
The IRS goes on to say, "At a minimum, the employee should keep a record of each call and its business purpose. If calls are itemized on a monthly statement, they should be identifiable as personal or business, and the employee should retain any supporting evidence of the business calls. This information should be submitted to the employer, who must maintain these records to support the exclusion of the phone use from the employee's wages."
On the other hand, if the phone is employee-owned, the IRS says "the listed property requirements do not apply. Any amounts the employer reimburses the employee for business use of the employee's own phone may be excludable from wages if the employee accounts for the expense under the accountable plan rules."
Senators John Kerry (D-MA) and John Ensign (R-NV) and Representatives Sam Johnson (R-TX) and Earl Pomeroy (D-ND) have sponsored the MOBILE Act (S. 144/H.R. 690) to address this matter.
Dow Jones Newswires
quotes statements Shulman made on the C-Span's "Newsmaker" program: "We're quite hopeful Congress is going to act on this. In the meantime, we're not doing anything special or moving forward with any initiatives. Our hope is that there will be legislation to clean this up."
Wireless industry association CTIA lauded the news. In a prepared statement released Jan. 11, 2010, CTIA President / CEO Steve Largent said, "The existing rule is an anachronism and it can't be saved simply by giving it a facelift. That's why we are focused on continuing to secure congressional support for the MOBILE Act, which enjoys broad bipartisan support on both sides of the Capitol. It is our hope that Congress act soon to help employers and employees alike by repealing this absurd, outdated rule."
According to CTIA, when cell phones were added to the listed property rule in 1989, mobile phone use was uncommon and cell phones were considered luxury items. Despite the near ubiquity of mobile devices today, employees are still required to maintain logs detailing their business use on a mobile device.
CTIA says the IRS expects individuals to record:
- the amount of such expense or other item
- the time and place of the use of the property
- the business purpose of the expense, and
- the business relationship to the taxpayer of the persons using the property.
Town employees who need to be available via cell phone will be required to provide their own phone and will be given a flat stipend for using the phone for work purposes. The town had issued 31 cellphones to employees.
Town Manager James Ervin tells the Franklin News Post that the town can save more than $5,000 a year if it stops issuing cell phones. Currently, the town pays $19,980 a year for cell phones and spends 240 staff hours managing the programs. The new policy will cost $14,820 a year with no staff hours for administration (the staff hours have a value of about $6,000).
"I estimate this will save over $5,000 a year, will enable the town to comply with IRS rules and will free up staff time to focus on other issues," Ervin said.
The county already has a policy in place that says the cellphones are not for personal use, and employee bills are audited. The total cellphone bill for the county is about $14,000 a quarter, according to a report in the Kilgore News Herald.
The IRS also notes that "For a for-profit business, the designation of an item as 'listed property' has implications for depreciation deductions taken by the business and the computation of net income."
Individuals Must Watch Deducations
Even those employees who pay for their own cellphones for business purposes may not be able to claim the service as a business deduction if they have not kept careful records.
He did not keep a log of his calls, but he estimated that 80 percent of the calls had a business purpose. The court ruled that estimates can not be used, and the taxpayer should have maintained adequate records or present corroborative evidence to support the deduction.
So what should your enterprise or government agency do if you provide your employees with cellphones?
- Assess your existing policies for corporate-issued smartphones, and require your employees to keep records of each call and its business purpose.
- Regularly audit smartphone records and require employees to reimburse the company for all personal use.
- Consider whether an individual-liable model is appropriate for the cellphone users in your enterprise.