We love good news that makes tax record-keeping easier! If your employees use cell phones for business, the rules for deducting the expense have gotten much easier. Previously, a cell phone was considered by the IRS to be “listed property,” a special category for deductions. Listed property includes items that the IRS considers to have potential for personal use that might be inadvertently deducted. So, for computers, camera equipment, certain autos, and formerly, cell phones, it is required to keep records of both business and personal use. If the business use percentage is more than 50%, then the opportunities for deductions and depreciation increase.
The Small Business Jobs Act of 2010, enacted last year by Congress, removed cell phones from listed property. Recently the IRS issued guidance on how exactly this applies to filing taxes.
The key point is that the cell phone must be used for business purposes. Here’s the IRS explanation –
if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. For example, the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day are possible substantial noncompensatory business reasons. 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.
Any personal use by the employee is considered a minimal fringe benefit, not included in wages and not necessary to track or report. Yeah!
Let’s see how it applies to employee cell phones:
EMPLOYER-PROVIDED CELL PHONE
If the cell phone is provided to the employee for noncompensatory business reasons, then it is an excludible fringe benefit. The business can deduct the expense and it is not compensation for the employee. It is now not necessary to track the employee’s business and personal use.
EMPLOYEE CELL PHONE REIMBURSEMENTS
If the business reimburses employees for their personal cell phone, note that per the IRS, “the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone.”
IRS Notice 2011-72
IRS Memo SBSE-04-0911-083