News From the
Committee on Small Business
Nydia M. Velázquez, Chairwoman

For Immediate Release                                                       CONTACT:  Alex Haurek; Duncan Neasham
September 4, 2009                                                                                                         (202) 226-3636

Velázquez on Proposed Changes to IRS Business Cell Phone Use Rules

WASHINGTON, D.C. —Today, Rep. Nydia M. Velázquez (D-NY), the Chairwoman of the House Committee on Small Business, released a letter written to Internal Revenue Service (IRS) Commissioner Douglas Shulman regarding proposed cell phone rules. The following is the text of Velázquez’s letter:

September 2, 2009

The Honorable Douglas Shulman
Internal Revenue Service
Attn: CC: PA: LPD: PR
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Notice 2009-46, 2009-23 I.R.B 1068 (6/8/2009)

Dear Mr. Shulman,

On June 8, 2009, the Internal Revenue Service (IRS) issued Notice 2009-46 (Notice) requesting comments from the public regarding proposed rules under consideration by the IRS. The notice requests comments on several proposals to simplify the procedures under which employers substantiate an employee’s business use of employer-provided cellular phones (cell phones) or other similar devices. I commend the IRS for taking an active role in addressing an issue of great importance to the nation’s small businesses.

In 1989, Congress added cell phones to the definition of listed properties and required extensive substantiation before an employer could take a deduction. At that time, cell phones were a blossoming technology, were relatively expensive, and the use of such devices in daily business activities was far from the norm. Today’s technologies and business realities are clearly different. Cell phones, Blackberrys, computers and PDA’s are now widespread throughout all types of businesses and integral devices for small business operations. The cost of such devices is also much lower than it was in 1989. Most wireless providers offer unlimited airtime for one monthly fee and there are very little start-up fees associated with enrolling in a plan.

I am encouraged that the IRS recognizes the burdens small businesses face attempting to comply with onerous recordkeeping requirements under the listed property rules in an area that is no longer considered potentially abusive. We appreciate the opportunity to comment on ways to simplify the procedures under which employers substantiate an employee’s business use of employer-provided cell phones.

The Notice outlines several proposals to simplify the substantiation requirements applicable to employee usage of employer. They include two proposals under a Minimal Personal Use Method, one under a Safe Harbor Substantiation Method and a final one under a Statistical Sampling Method. The Committee offers comments on all three proposals.

Under the Minimal Personal Use Method, the IRS is considering one proposal that would allow an employer to deem the entire employee’s usage for businesses purposes if the employee can account to his employer that he maintains and uses a personal cell phone for personal purposes during the employee’s work hours. To minimize the recordkeeping requirements, the IRS should define a sufficient record provided by the employee as something as simple as a signed statement by the employee, stating that he uses his personal cell phone during work hours. This statement could also include the employee’s plan provider and stating the phone number of his personal cell phone. Making the sufficient record requirement easy to comply with can minimize the cost compliance and eases administrative burdens for the small business and its employees.

The Notice also states that IRS is contemplating a second proposal under the Minimal Personal Use Method. This proposal would potentially define a specified or type of minimal personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone. For example, the IRS suggests that “minimal” could be defined by reference to a particular number of minute of use for certain personal uses. However, this could prove burdensome by forcing small business owners, who are busy running their business, to sit down and calculate the number of minutes an employee uses his or her cell phone. A better approach might be to designate a certain number of calls as de minimus, which would make tracking them more manageable. Since they would be considered de minimus, the employee would not have imputed income and employer could take a deduction for the rest of the calls would be deemed for business use.

According to the Notice, the IRS is considering a Safe Harbor Substantiation Method. Under that scheme, the employer would be able to treat a certain percentage of the employee’s use of an employer provided cell phone as business usage. The IRS and Treasury Department have proposed a 75% business usage. Again, because attempting to calculate minutes could be time consuming, the Committee suggests allowing employers to take a 75% deduction on the cost per month of the plan they provide their employees, as opposed to having that reference to a particular number of minutes. Under this approach, employers can look at the bill paid to their cell provider, and automatically take a deduction for 75% of the cost of the plan.

Finally, the Notice invites comments and suggestions on other approaches as the IRS contemplates modifying and simplifying substantiating requirements for employee usage of an employer provided cell phone. Based on concerns expressed to the Committee on Small Business, I would also like to highlight some other considerations as the IRS contemplates. One area the IRS should consider is that many employers adopt cellular plans that now contain an unlimited minutes for a fixed fee. When cell phones were added as a listed property in 1989, the costs of plans were much more expensive than now.

Today’s cell phone plans are much less expensive and the use of cellular technology is ubiquitous in the business place. Allowing a full deduction for the cost of a plan that provides unlimited minutes would alleviate the need for onerous recordkeeping requirements under the listed property rules in an area that is no longer considered potentially abusive. Also, taxpayers would no longer be subject to penalties and taxes for not meeting the substantiation requirements under audit.

As the IRS moves forward on finalizing a rule, I also urge the agency to continue studying the impact and attempt to draft a plan that minimizes the impact to employees that do use their cell phones for limited personal use. Under Internal Revenue Code §274, if the cell phone is partially used for personal purposes, the fair market value of the employee’s use is a taxable fringe that is to be included in the employee’s gross income. Again, forcing employees to recognize income from their personal use of a cell phone, especially when that use is de minimus, is a relic of the past when cell phones were considered a luxury item and their use confined to a select few. Further, the administrative expense incurred by employers and employees in tracking this “income” coupled with the time, money, and resources the IRS must devote to auditing employees greatly out weighs the revenue impact to the Treasury in this regard.

Again, I would like to thank you for taking an active role in this issue. The ability for small businesses to utilize emerging technologies at a low cost without fear of an IRS audit will only help small businesses grown and develop in the 21st century. In fact, I introduced legislation in the 110th Congress (H.R. 6601) and am a co-sponsor supporting H.R. 690. Both pieces of legislation remove cell phones as a listed property and fully address the concerns discussed in this letter. However, until the time when legislation is enacted removing cell phones as a listed property, the Committee supports the IRS’s efforts to aid the millions of small businesses that would benefit from having the procedures under which they substantiate business use of employer provided cell phones.

The Committee realizes there are multiple considerations under this proposal along with other issues to be resolved in this area and I look forward to working with the IRS and Treasury to address this very important issue.

Sincerely,

Nydia M. Velázquez
Chairwoman

###