Guest Article

(From the October 4, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Taxation of Employer-Provided Cell Phones: Heightened Substantiation No Longer Required

The smoke is clearing around the taxation of employer-provided cell phones, with the heightened substantiation requirements no longer applicable for taxable years beginning in 2010 as a result of the recently-passed Small Business Jobs Act. However, records must still be maintained to substantiate the exclusion from employee income under Code § 132(d).

The Small Business Jobs Act of 2010 removed cellular telephones and other similar telecommunications equipment from "listed property" under Code § 280F(d)(4) effective for taxable years beginning after December 31, 2009. "Listed property" is subject to heightened substantiation requirements - requiring records adequate to corroborate the amount of the expense, the time and place of the use of the property, the business purpose, and the business relationship to the property - to be excludable as a working condition fringe benefit under Code § 132(d),

With the deletion of cell phones from "listed property," the ability to exclude the benefit from employees' taxable income has become less burdensome. The heightened substantiation requirements no longer apply. However, an employer-provided cell phone must still be established as a business expense in order to be exempt from the employee's income as a working condition fringe benefit. If the employee uses the phone for personal use, the employer is required to include the appropriate amount of that benefit in the employee's taxable income. The amount of the taxable benefit is based on what the individual would have to pay for the particular benefit in an arm's length transaction, not the employer's cost.

Despite the Small Business Jobs Act change, taxpayers and their advisors will be looking to the IRS for further clarification and possible relief regarding personal use of an employer-provided cell phone being included in the employee's income. In its Technical Explanation of the Tax Provisions of the Small Business Jobs Act, the Joint Committee on Taxation noted that the change in law does not impact the IRS's authority otherwise. The IRS still retains the authority to determine when employer-provided cell phones are a working condition fringe benefit under Code § 132(d) (i.e., excludable from income because they satisfy the requirements of a deductible business expense under Code § 162), and also when they are a de minimis fringe benefit under Code § 132(e) (i.e., excludable from income not because of Code § 162 but because the value of the property and services, after taking into account the frequency with which similar fringes are provided by the employer to its employees, is so small as to make accounting for it unreasonable or administratively impracticable).

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.