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I admit, before I came to law school, and before I had taken a class on federal tax law, I was really looking forward to the day that I would graduate, get a job, and get my own blackberry or iPhone. As a student, I am not in a position to afford or need one, but I envied the guy who could check out the score of the Astros’ game while waiting in line at the DMV, or while enduring some other equally mind-numbing activity.
However, the dream of a tax-free handheld device or cell phone has been completely shattered for me thanks to the Internal Revenue Code (a code that has surely shattered many a dream). Under § 280F of the I.R.C. , employers have a couple of tax options if they choose to provide cell phones to their employees. First, they can exclude the value of the device from the employees’ wages by complying with onerous substantiation requirements. To exclude the benefit of the device from income, the employer must collect annotated monthly statements from employees to support deductions and employee income exclusions, by separating personal calls from business calls on the monthly statement. If that isn’t a viable option–and of course, it is not a realistic option for many people–then employers must treat the value of the devices, which would include the cost of the device in addition to the service plan, as a taxable benefit and include it as income on the employees’ W-2 forms. This could be a substantial amount considering the cost of the device as well as the pricey monthly plan, giving the employee upwards of $1,000-$1,500 more in income. Many employers, fearing audits and other consequences, have chosen to forego providing cell phones to their employees altogether in light of the confusing tax laws.
Luckily, Professor Caron over at the Tax Prof Blog has been following this issue closely. Just as I was giving up on my tax-free iPhone dream, I learned about IRS Notice 2009-46, issued on June 8, 2009. This Notice–which was coincidentally released on the same day as the new iPhone 3G S–asks for comments regarding a more feasible method of delineating business cell phone use from personal use. While a call for comments is not the tax break I was hoping for, it did lead to this statement from the IRS on June 16 in the wake of pointed criticism from various media outlets:
This month, the Internal Revenue Service asked for comments on ways to simplify compliance with rules related to employer-provided cellular telephones. The current law, which has been on the books for many years, is burdensome, poorly understood by taxpayers, and difficult for the IRS to administer consistently. Some have incorrectly implied that the IRS is “cracking down” on employee use of employer-provided cell phones. To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals.
Although some of the proposed changes would add clarity, the current law will inevitably leave widespread confusion among employees and businesses. Therefore, Secretary Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete. (emphasis mine)
My dream of a tax-free iPhone may become a reality after all. Last year, Reps. Sam Johnson (R-Tex.) and Earl Pomeroy (D-N.D.) sponsored legislation to repeal the law, which passed in the House but not the Senate. Sens. John F. Kerry (D-Mass.) and John Ensign (R-Nev.) have introduced a similar bill this year. Regardless, it appears that the IRS is attempting to rectify the confusing nature of current tax laws as they relate to business cell phone use.
– Megan Bibb
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