Friday, September 24, 2010
The Small Business Jobs Act of 2010 has passed through Congress and is on its way to the President's desk for signature. While the majority of the bill is directed at for profit businesses, there is a provision that will bring great relief to nonprofits as well as for profit businesses. The bill contains the long awaited relief for the onerous rules regarding employer provided cell phones. Under the old law, cell phones were treated as "listed property". This classification required the extensive documentation of who, when, and why of each call in order to substantiate the business purpose of the call and the related business use of the phone. This classification was created at the time when cell phones were rather large and sat in our cars and not in our pockets. The phones and the calling plans were very expensive. The recent advances in technology have created a totally different animal. Between cheap phones, flat rate plans and data services, the substantiation requirements of "listed property" became a burden too great to bear. In recent years, employers have either gone to not paying for the phones at all or including the entire expense for the phone in an employee's taxable income. In response to requests from the Treasury Department, Congress has "delisted" cell phones. This places them under the general rules for proving up business expenses. This doesn't mean that cell phones can become a free for all benefit. There are still other issues that have to be addressed by employers. The employers have to carefully consider providing cell phones to employees due to the inherent personal use of the phones. Working Condition Fringe Benefit: Employers can provide the cell phones as "working condition fringe benefits". However, in order to meet this test, the phone has to still be used in a business fashion that would allow the employee to deduct the expense, if the employee paid it personally. Therefore, the phone has to have a significant business purpose. Only the business portion can be excluded from the employee's income. However, now that the phone is not "listed property", it may be easier to determine a reasonable amount that can be considered as business use without the requirement of documenting every single phone call. De Minimis Fringe Benefit: Employers may determine that the amount of personal use of the phone is so small that accounting for it is unreasonable or administratively impracticle. In this case, the employer will make the case that the personal use is a "de minimis fringe benefit" that does not have to be valued for inclusion in the employee's personal income. The result is that employers have to take an honest look at their cell phone policies and determine if the personal use is so small that it can be considered as de minimis or that the personal portion is such that the employer will decide to consider a portion of the phone as personal and either have the employee pay for that portion or include that portion of the cell phone bills as a taxable fringe benefit on the employee's Form W-2. In any case, we no longer have to demand who, when, and why of every call in order to make the decision. Warning: Do not consider this change the liberty to provide employees with cell phones on a tax free basis without any thought or consideration to the business use of the phone. Employers should clearly document why they believe the cell phone is a business related expense and be prepared to support any challenge from the IRS as to the provision of a cell phone as a tax free fringe benefit.