Cell Phones Excluded From IRS “Listed Property” Rules
Effective for years beginning after Dec 31, 2009, cellular telephones (cell phones) and other similar telecommunications equipment are not part of the categories of “listed property” under Code Sec. 280F(d)(4).
Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property don't apply to cell phones. That is, a taxpayer using his or her own cell phone for business purposes isn’t limited to using straight-line depreciation under the ADS system when business use is 50% or less. Further, an employee's use of his own cell phone does not have to be “for the convenience of the employer” and “as a condition of employment” for business-related costs of the phone to be deductible.
Employers may deduct the cost of providing cell phones to their employees for employment-related business use, without having to satisfy the strict substantiation requirements for listed property. To support a deduction for the cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the deduction for other types of business equipment.
Cell Phones as an Excludable Fringe Benefit
IRS Notice 2011-72 provides guidance on the treatment of employer provided cell phones as an excludable fringe benefit.
Employer Provided Phone
When an employer provides an employee with a cell phone primarily for non compensatory business reasons, the business and personal use of the cell phone is generally non-taxable to the employee (as a working condition fringe benefit for the business portion and a de minimis fringe for the personal use). The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.
An employer will be considered to have provided an employee with a cell phone primarily for non compensatory business purposes 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. Examples of possible substantial non compensatory business reasons include:
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The employer's need to always contact the employee for work-related emergencies,,
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The employer's requirement that the employee be available to speak with clients at times when the employee is away from the office, and,
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The employee's need to speak with clients located in other time zones at times outside of the employee's normal workday.,
A cell phone provided for the following reasons will not be considered as provided primarily for non-compensatory business purposes:
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To promote the morale or good will of an employee
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To attract a prospective employee, or\
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as a means of furnishing additional compensation to an employee.
Employer Reimbursement for Cell Phone Expenses
Although Notice 2011-72 does not cover the situation where an employer reimburses the employee for cell phone expenses, the IRS did issue a memo on September 14, 2011, to all field examination operations bringing this issue and Notice 2011-72 to the attention of the audit staff (Control Number SBSE-04-0911-083).
Where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. However, the employee must maintain the type of cell phone coverage that is reasonably related to the employer's business needs, and the reimbursement must not exceed the employee’s actual cell phone expenses. Additionally, the reimbursement for business use of the employee's personal cell phone must not be a substitute for a portion of the employee's regular wages. IRS examiners are directed to closely scrutinize arrangements that replace a portion of an employee's previous wages with a reimbursement for business use of the employee's personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses.
The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.