A lot has changed since 1989, especially when it comes to cell phones. In 1989, cellular telephones were built into cars or came in suitcase-like bags with cords and antennas. There was no such thing as an unlimited calling plan and the cost of minutes ranged from costly to very costly.
What hasn’t changed since 1989, however, is the way that taxpayers must substantiate their business use of a cell phone under the Internal Revenue Code. The IRS still treats cell phones as “listed property” under Section 280F, meaning that detailed records must be kept by the taxpayer or employer, segregating business and personal cell phone use in order to claim a tax deduction.
To determine business use percentage and withstand audit scrutiny, employers must collect and retain monthly statements, which generally set forth the amount of the expense, the time and date of each call and the number dialed. To the extent that employees can demonstrate calls placed to customers or clients, the business purpose and business relationship should withstand scrutiny. Failing to maintain adequate documentation may result in lost deductions and possible federal employment tax assessments for employers, not to mention automatic excess benefit taxes for employees of nonprofits who failed to properly account for personal use.
The good news is that change may be on the way. On April 14, 2010, The U.S. House of Representatives passed H.R. 4994 (The Taxpayer Assistance Act of 2010). Included in the legislation is a provision that would eliminate the strict substantiation rules that are currently in place for employer-provided cell phones and similar devices.
Under the proposed legislation, an employer-provided cell phone would be treated the same as an employer-provided landline phone located in an employee's office, which is a business asset of the employers. Consequently, personal phone calls made from an employer-provided cell phone would be treated as a nontaxable fringe benefit in the same fashion as if the call was placed from an office phone. Under the proposed legislation, the employer would not be required to track the employee's personal use of an employer-provided cell phone.
If approved by the Senate, the cell phone provision would be effective for taxable years beginning after 2009. Schneider Downs will continue to monitor and evaluate this proposal as it makes its way through the legislative process.
For more information concerning our accountable plan tax services, or other nonprofit matters, please feel free to contact Susan Kirsch or Debra Ries at (412)261-3644.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.