IRS Looking to Ease Cell Phone Recordkeeping Requirements

Although cell phones have almost become a business necessity (try finding a pay phone these days), the government is still concerned that taxpayers who use them for business also use them for personal calls but write off the entire cost as a business expense.  Because of that, cell phones are still included in the definition of “listed property,” and expenses related to listed property may not be deducted for income tax purposes unless the employee or self-employed individual substantiates by adequate records, or by sufficient evidence corroborating the employee's own statement:

(1) The amount of the expenses;

(2) The time and place of the expenses;

(3) The business purpose of the expenses; and

(4) The business relationship to the employee of the persons involved in the expenses.

In addition, employees must document their personal use of a company issued cell phone, and the employer must include the value of personal use in the employee's income on Form W-2.  In the case of self-employed individuals, the personal-use portion of the cell phone’s expense cannot be deducted.

Keeping adequate records can be a time-consuming nightmare and is non-productive.  Both industry sources and the IRS recognize this is a burdensome task that needs to be made simpler.

IRS has been waiting for legislation to be enacted that would ease the recordkeeping requirements in the antiquated rules, but so far that hasn't happened.  In 2008, two bills entitled ”Modernize Our Bookkeeping In the Law for Employee's Cell Phone Act of 2008” were introduced in Congress to remove cell phones and similar telecommunications equipment from the category of listed property.  These measures, which had bipartisan support, were never enacted.

Help May Be On The Way – Although the rules listed above are still in effect, there is an indication that the IRS might soon take matters into its own hands by issuing guidance that would simplify the rules.  IRS is currently considering appropriate arrangements between the employer and employee, such as an arrangement under which a company treats 25% of the usage of their employer-provided cell phones as personal use (taxable).  Another possibility would be where an employer would provide a taxable cell phone allowance to employees.

But don’t jump the gun; these are “drawing board” solutions and are not sanctioned yet.  If you have questions, please give this office a call.

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