Advisory Committee on Tax Exempt and Government Entities (ACT ...

Tax Treatment Of Cellular Telephones And Internet-Provider Allowancesthat can be used for personal purposes. This designation as listed property in section280F(d)(4)(A)(v) has implications for both business deduction and fringe benefitpurposes, because of the detailed recordkeeping requirement with respect to suchproperty.The detailed substantiation rules set forth specifically apply to “any listed property (asdefined in section 280F(d)(4)).” See Section 274(d)(4) of the Code. Under theregulations, deductions for expenses attributable to the business use of cellular phonesare disallowed unless the taxpayer substantiates by adequate records or by sufficientevidence corroborating the taxpayer’s own statement the amount of the expenses, thetime and place of the use of the list property, and the business purpose of the expense.See Generally Treas. Reg. 1.1274-5T(b)(6) and 1.274-5T(c).Cellular phone expenses include the purchase price of the equipment (or annualized‘lease value’ approximation of that price), monthly service charges and any additionalper minute, roaming, long-distance or other operating charges. See, e.g., Treas. Reg.1.274-5T(6)(i).There is an interaction with the working condition fringe benefit exclusion of section132(d) and “accountable plan” rules of section 62(c) of the Code. If an employerprovides a cellular phone and a service plan to an employee (by either paying for thebenefits directly or reimbursing the employee), the exclusions set forth in section 132(d)for working condition fringe benefits and in section 62(c) for tax-free expensereimbursements under the accountable plan rules apply only to the extent that records(including records of both incoming and outgoing calls) are kept to substantiate thebusiness use each calendar year.Note: The exclusion for working condition fringes generally covers any propertyor services provided to any individual (including independent contractors)currently performing services for the employer to the extent the expenses wouldhave been deductible under Section 162 or 167 of the Code (including section274, when required to be applied), if the individual had paid for the benefit andthe expenses relate to the employer’s business. Sections 132(a)(3) and 132(d)of the Code; Treas. Reg. 1.132-5. Likewise, one of the required elements forexcluding and expense reimbursement from the employee’s income and wagesunder Section 62(c) of the Code is compliance with the detailed substantiationrequirements of Section 274(d), when applicable. See Treas. Reg 1.62-2(e)(1)and -2(e)(2).If insufficient or no records are kept, the exclusions for working condition fringes andaccountable plan reimbursements will not apply to exclude the business use of thecellular phone (and the related service plan expenses) from the employee’s grossincome. Therefore, the value of the benefits must be included in the employee’s grossincome and treated as wages for payroll tax purposes. See Treas. Reg. 1,724-5T(e).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 4