Small Business Taxes & ManagementTM--Copyright 2011, A/N Group, Inc.
In the 1980's Congress introduced the concept of "listed property". Listed property are assets that could be used for both business and personal purposes. A auto is the most frequently encountered example. Computers, cameras, DVRs, could also be listed property depending on how they're used. Cellphones have been classified as listed property until recently. The concept of listed property is important because the recordkeeping requirements are strict--you must keep a log of all usage of the property in order to secure a deduction--no exceptions. If the property isn't used 100% for business, the nonbusiness portion of the expense is not deductible.
The approach may make sense for autos. The dollar amounts involved are usually significant and logging the date, mileage driven and business purpose for the trip isn't an excessive requirement. Logging every cell phone call is.
The rules below apply to tax years beginning after December 31, 2009.
The Small Business Jobs Act of 2010 removed cellphones from the definition of listed property after December 31, 2009. That means the strict substantiation requirements are no longer required. The IRS has just issued Notice 2011-72 and News Release IR-2011-93, providing guidance on a number of issues related to the new rules.
First, the law doesn't change the fact that providing a cell phone to an employee is a fringe benefit. What the law does change is that providing the cell phone may now be a "working condition fringe". A working condition fringe is property or services provided to an employee that, if the employee paid for the property or service himself would be allowable as an employee business deduction. For example, Sue needs steel toe boots and a hard hat on her job. Madison provides the boots and hard hat, both of which Sue takes home at the end of the day. Since she could deduct the cost of the items if she paid for them herself, the items are a working condition fringe.
Second, the new rules require that the cell phone be provided primarily for a noncompensatory buisness reason. That means the primary reason for providing the phone is to enable the employee to do his or her job, not to provide them with additional income. For example, Fred Flood is the CFO of Madison. He never has work outside the office, is not on call, and has no reason to have a cell phone for business purposes, but the company provides him with a new cell phone every two years. Since the company can't show the phone is primarily for business, it's considered additional compensation and the value is included on his W-2 even under the new rules. Sue Sharp is in outside sales and uses her phone substantially more than 50% of the time to call customers and suppliers and keep in touch with the office. The phone is a working condition fringe benefit, and is not considered additional compensation.
A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.
While the strict substantiation requirements have been dropped, you're still going to have to show the cell phone was provided for a noncompensatory business reason. In some cases that's going to be easy. (In Sue's case above, it should be obvious.) In others, not so much. You may be hard pressed to meet the test for an employee who rarely leaves the office, isn't on call, etc. Since the phone and service could easily add up to more than $600 a year, you don't want the deduction disallowed. You may want to retain bills, or some other documentation for providing the phone if you think you can still meet the primarily for business test. Talk to your tax advisor.
The IRS has held that, if the other requirements are met, it will treat the value of any personal use of a cell phone provided by the employer as a de minimis fringe benefit. That means, the personal use would not be included as compensation to the employee.
Finally, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees' expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages.
Copyright 2011 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 09/21/11