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The IRS is Calling — a Common Sense Solution for Business Cell Phone Expenses!

The Small Business Jobs Act (better known as the Hire Act) provided that cell phones are no longer considered “listed property” for tax years beginning after December 31, 2009. “Listed property” required extra substantiation/tracking requirements for proving the deductibility of business-related cell phone expenses. This act did NOT alter the requirement that personal use of an employer-provided cell phone is a fringe benefit that must be included in the income of the employee (unless an exclusion applies). Consequently, in practice, we were still seeing IRS agents request proof of business use versus personal use of cell phones for each employee. In practice, because of the number of cell phone calls made per phone, difficulty in tracing such numbers, and the fact that many plans provide for a set cost per month for a use-it-or-lose-it number of minutes, the ability to calculate a fringe-benefit income amount was, at best, cumbersome, if at all possible (ignoring the time and costs that it would take to make a calculation for each employee). Many believed that if such a calculation were possible the includable income was likely de minimis for most typical business taxpayers. However, as our experience has shown, many IRS agents upon exam are still trying to disallow as a business expense at least 20% to 30% of a cell phone plan's total cost unless calculations are provided. These calculations are very difficult and time consuming to prepare. Of course, many of these requests relate to years before the enactment date of the Hire Act, so technically the old rules did still apply.

The questions to the IRS since January 2010 have been, “What record keeping must an employer maintain under the new rule regime? Did it change materially from the old requests from IRS agents?” On September 14, 2011 the IRS issued Notice 2011-72 to answer these questions. This notice appears to give a common sense solution to address the deductibility of business cell phone expenses and whether employees must include in income any personal use of these costs. 

As a result of this notice, employers who can demonstrate that there are substantial reasons relating to the employer's business regarding a need for the employee to have a cell phone will be considered to have provided the phone for noncompensatory business purposes. A few examples of substantial reasons are for work-related emergencies, the need to contact clients after business hours or when out of the office on regular business trips, or when contacting clients in different time zones. Providing cell phones for the good will of employees or a means of furnishing additional compensation are not considered substantial reasons. Provided the employer meets the noncompensatory business purpose, then the subsequent application of Section 132 provides that “gross income” does NOT include any fringe benefit that qualifies as a “de minimis” fringe benefit. A “de minimis” fringe benefit is any property or service whose value is so small as to make accounting for it unreasonable or administratively impracticable. We believe that many employers should be able to take advantage of Section 132 on behalf of their employees (and themselves).

If an employer decides to reimburse an employee for use of the employee’s personal cell phone, the employer should be sure to not reimburse the employee for more than the monthly cost of the employee’s cell phone plan, and the payment amounts should be consistent in amount and timing throughout the year. While the notice did not apply to reimbursements, the IRS has indicated that they will follow a similar reasoning with employers who reimburse employees for business cell phone usage.

For a more detailed discussion of this bill or any tax matter please contact David Lowenthal at dlowenthal@BlackmanKallick.com or 312-980-2954, Michael Calahan at mcalahan@BlackmanKallick.com or 312-980-2996, or your Blackman Kallick representative. Our thanks to Nick Leach for his contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.