Cellphones have been the subject of uncertainty on the part of the IRS for some time, now. Originally falling under the category listed property they were deductible, but with rigorous reporting provisions on the part of the Agency.
But in 2010, cell phones were removed from listed property under The Small Business Jobs Act. Expenses related to cell phone use are now deductible under the category fringe benefits.
But the question is – where’s the line?
Employee Fringe Benefits
If an employer expressly provides a cell phone to an employee, it’s a fringe benefit. The phone’s value and monthly charges adhering fall under the employee’s taxable earnings.
But if the employee can prove that their use of the phone is primary for conducting business, that’s no longer the case. In instances where this can be proven, no record keeping is required, as the phone is considered non-taxable.
Working Condition and De Minimis
Even if the employee uses the phone to make personal calls, the equipment and its use is still considered a business expense under the IRA’s rules, as a “working condition fringe benefit”.
The employer can still deduct the monthly expense of the phone and the employer may not be taxed for its use.
But for this to happen the primary business purpose of the employee having the cell phone must satisfy the IRA to be a deductible expense.
If your small business provides employees with cell phones, then personal calls on the part of the employee are considered a de minimis fringe benefit. This Latin legal term means that the personal use involved is “too small to worry about”. In practice, this means that the amount which might potentially be deemed taxable would be too administratively onerous to pursue.
If you’re using the promise of a top-of-the-line mobile device to attract talent or to foster goodwill, these are not business purposes.
And the IRS being what it is, it’s important that you maintain solid records of employee cell phone usage. Even though the requirement for record keeping is ostensibly eliminated by the new legislation, you may be called upon by the Agency to demonstrate that the phone has not been provided for any other than what the IRS defines as “business purposes”.
Employee cell phone usage should be managed just as diligently as any other area of your business. Some best practices include:
- Not slinging cell phones at every employee. Remote employees (sales people, executives, traveling managers) are those who genuinely need them.
- Arranging with your provider for access to online usage logs for all employees who have company cell phones to monitor usage.
- Policies and procedures with explicit language about employees having their own cell phone for personal use to preclude any misunderstandings with the IRS.
Keeping a lid on how your company phones are used maintains clarity and keeps your nose clean with the Agency and that’s a best practice, all on its own.
Contact Norton Financials. Find out how we can take the books off your hands.