The Internal Revenue Service has recently been focusing their attentions on the taxation of business and personal use of cellular telephones to employees, resulting in additional taxable compensation to employees for income and payroll tax purposes. A summarized review of the substantiation requirements follows.
Cell phones are identified by the IRS as “listed property,” which is property that by its nature lends itself easily to personal use. Listed property is subject to strict requirements substantiating business use, including the following:
- Amount of expense;
- Time and place of use;
- Business purpose; and
- Business relationship of the taxpayer to the person using the property.
If these substantiation requirements are met, then all business use of the cell phone is excludable from the employee’s wages and income and payroll taxes as a working condition fringe benefit. Any amount of personal use (including the cost of each personal call along with a pro rata share of the monthly service charges) is required to be included in the employee’s wages. When the substantiation requirements are not met, the value of the phone, along with charges for individual calls and the monthly service charges, are taxable to the employee as compensation. There are no de mimimis exceptions to the substantiation requirements.
To meet these strict requirements, it is advisable for employers to have a written policy requiring employees with company-owned cell phones to maintain the required records as listed above and submit copies of this documentation to the employer on a regular basis. If a monthly statement lists out the date, time, and phone number for individual calls, employees should document the business purpose of each call, along with any available supporting documentation, and the business relationship to the taxpayer. If an employee reimburses an employer for any personal charges within a reasonable time, then the value of the business use portion would not be taxable to the employee.
When the employee owns the cell phone, reimbursement of business-related calls should be made under an accountable plan in order to meet the substantiation requirements and be excludable from the employee’s compensation and income and payroll taxes. An accountable plan requires that employees submit documentation substantiating business expenses and return any excess reimbursement to the employer within a reasonable time.
Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any advice included herein is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Additional issues may exist that could affect the federal tax treatment of the transaction on the matter that is the subject of this advice, and this advice does not provide a conclusion with respect to such issues. That said, please do not hesitate to contact us if you have any further questions regarding this matter.
Guest Blogger: Eric Schwefler, CPA, Partner, Caliber Accounting Group