Cell phones are no longer listed property
For several years, the IRS has treated cell phone expenses for businesses and employees as part of a category of business assets called listed property. This category of assets includes assets that can be used for both personal and business purposes, so the IRS required more detailed record keeping on the part of businesses in order to separate use of cell phones as deductible business expenses from personal use.
A provision of the Small Business Jobs Act of 2010 removed cell phones from the category of listed property.
Cell phones are a fringe benefit
Although the IRS removed cell phones from the listed property category, it did not remove cell phone costs from the category of fringe benefits. Most businesses these days require employees who travel or who are in management positions to have cell phones. But how much of the cell phone use is personal and is this personal use a taxable benefit to the employee? The IRS says that an employer-provided cell phone is a fringe benefit to the employee, and the value of the phone, including both cost of the phone and monthly charges, is taxable to the employee unless it can be proven that the phone is being used primarily for business purposes. (Internal Revenue Bulletin 2011-38)
But the IRS also says that "when an employer provides an employee with a cell phone primarily for...business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require record keeping of business use in order to receive this tax-free treatment."
Working condition fringe benefit
The IRS calls cell phones a "working condition fringe benefit," that is, "any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction" as an ordinary and necessary business expense. As a working condition fringe benefit, employee personal use doesn't affect the ability of the business to deduct business-related cell phone costs, nor is it taxable to the employee as a fringe benefit. It's important to note that the primary business purpose must be established, in order for the business-related expenses to be deductible to the business and to avoid having the personal use of the employer-provided phone taxed to the employee. The non-business personal use of the cell phone is not deductible as a business expense of the company.
If you require employees to use cell phones for business purposes, the employee's personal use is treated for tax purposes as a de minimus fringe benefit as defined by the IRS. This IRS provision applies to use of an employer-provided cell phone after December 31, 2009.
Business purposes for cell phones
The "ordinary and necessary" is determined by the IRS and applies to cell phones in specific ways. An example used by the IRS to describe "business purposes" is the requirement by the employer for contacting the employee during non-business hours. The IRS says that providing the cell phone for "morale or goodwill" purposes, to attract a new employee, or to provide additional compensation to an employee is not considered "business purposes" and does not exclude the cell phone from being a fringe benefit.
Keeping records on cell phone use
Taking cell phones out of the listed property category does not mean you can ignore the issue of keeping good records on personal use of cell phones. You still must be able to prove that the phone was used primarily for business purposes.
What to do next
To avoid tax audit issues and comply with the laws regarding business-related cell phone use, discuss the issue with your tax advisor. Some measures you may want to consider:
- Restrict cell phones only to those employees who must have them to properly perform their duties, such as outside sales representatives, managers who travel frequently, and executives.
- Keep employee cell phone logs to verify business usage. If this is onerous, find a way to access online cell phone logs through your carrier, so you can retrieve them if necessary.
- Require that employees with company-provided cell phones have another cell phone for personal use.