We have more than 20 employees here at Palisades Hudson, each of whom has a telephone on his or her desk and a life outside the office. If someone makes a personal phone call to check on the kids or to find out what to bring home for dinner, I don’t care.
Neither does the Internal Revenue Service. Even though an employee may personally benefit from using that company-provided phone, any personal use of the landline is trivial. It costs the business next to nothing and is not worth the bother of trying to track and to tax. The IRS understands this, perhaps because IRS agents also have telephones.
Cell phones are another story.
About half our personnel — consisting of officers, managers and others with round-the-clock responsibility, like our computer specialist — have company-issued cell phones. You might call it a perk, if you think being constantly at the boss’s beck and call is a perk. Other people, no doubt, have other terms for this.
Not that I make it a habit to call people after hours or on days off, but occasionally the need does arise. A client may have an emergency, or a storm may require us to consider closing an office.
Moreover, these senior people are expected to check in twice a day when they are not at work, even when they are on vacation. They have to keep an eye on email, and the company must understand their equipment well enough to provide email access and ensure that its use is appropriate. They send and receive text messages. They visit client businesses and properties and take photographs. They can do all this with those company-provided phones.
They also, no doubt, make and receive some personal calls, emails and texts. As long as it doesn’t rack up the bills (we buy enough minutes to prevent any problems) or get in the way of work, I don’t care.
The IRS, however, does care. Maybe. Sometimes. I think. Even with a recent legislative “fix,” the rules governing personal use of company-issued cell phones are an archaic mess, rooted in a time more than two decades ago when a cell phone was a luxury item rather than a business necessity.
One small step forward came with the Small Business Jobs Act that President Obama signed into law on Sept. 27. The law removes cell phones from the Internal Revenue Code’s definition of “listed property.”
“Listed property” consists of items that are likely to be purchased by businesses but which lend themselves to personal use. Companies must prove that the items are primarily used for business purposes to be allowed to deduct these purchases as ordinary business expenses, according to accelerated depreciation rules. This makes sense for something like a car, which is likely to suffer substantial wear and tear due to personal use. Cell phones were added to the definition of listed property in 1989, and they remained on the list until this month.
The new law did not resolve the question of whether, and how, personal use of a business cell phone should be taxed. The IRS retains authority to determine whether personal cell phone use must be treated as a taxable benefit.
If the IRS insists that personal use of a business cell phone is a taxable form of compensation, employers must somehow track and determine the fair market value of minutes used for personal purposes. Imagine payroll clerks all over America scanning company cell phone bills (our small firm’s statements are hundreds of pages long), identifying each number as business or personal, and entering it into the computer. It would certainly help bring down unemployment, at least until businesses go broke or throw their phones in the trash.
As I wrote last year, the treatment of personal use of an employer-provided cell phone as a taxable benefit is antiquated and unreasonable. Having a cell phone and a laptop to use on the road is now as essential in many industries as having a desk phone and a PC to use in the office. The Small Business Jobs Act did not affect laptops, which continue to be listed property, subject to even stricter recordkeeping requirements than those that will now govern cell phones.
The Joint Committee on Taxation estimates that removing cell phones from the listed property definition will cost $410 million over 10 years. A newsletter from the law firm Morgan, Lewis & Bockius LLP comments that this seems to be “a very low number considering the wide proliferation of cell phones.” However it’s hard to believe that many taxpayers were actually complying with the old restrictions. This means that, whatever money the IRS has been getting from treating cell phones as listed property, it’s been getting it exclusively through selectively enforcing the issue on audits.
Most likely the IRS agents conducting those audits could have brought in more money by dedicating their time to more productive avenues of examination, rather than examining cell phone bills. Enforcing the rules, therefore, may have actually been costing the government money. Selective enforcement through audits is also fundamentally unfair, since only those who have the bad luck to get audited actually pay the tax, while others are permitted to blissfully ignore it.
Given a chance to do something to make the tax code slightly more rational, Congress did what it often does: It punted. Congress should have brought reality, common sense and the tax laws into a rare harmony by declaring that employer-provided cell phones and other business equipment, like laptops, are not taxable benefits to employees as long as the equipment is primarily intended and used for business purposes.
I hope that, while they’re out on the campaign trail, the members of Congress remember to track each call they make on their cell phones. And no, calling your spouse to whine about hardships of being a politician doesn’t count as a business call.
Posted by Larry M. Elkin, CPA, CFP®
We have more than 20 employees here at Palisades Hudson, each of whom has a telephone on his or her desk and a life outside the office. If someone makes a personal phone call to check on the kids or to find out what to bring home for dinner, I don’t care.
Neither does the Internal Revenue Service. Even though an employee may personally benefit from using that company-provided phone, any personal use of the landline is trivial. It costs the business next to nothing and is not worth the bother of trying to track and to tax. The IRS understands this, perhaps because IRS agents also have telephones.
Cell phones are another story.
About half our personnel — consisting of officers, managers and others with round-the-clock responsibility, like our computer specialist — have company-issued cell phones. You might call it a perk, if you think being constantly at the boss’s beck and call is a perk. Other people, no doubt, have other terms for this.
Not that I make it a habit to call people after hours or on days off, but occasionally the need does arise. A client may have an emergency, or a storm may require us to consider closing an office.
Moreover, these senior people are expected to check in twice a day when they are not at work, even when they are on vacation. They have to keep an eye on email, and the company must understand their equipment well enough to provide email access and ensure that its use is appropriate. They send and receive text messages. They visit client businesses and properties and take photographs. They can do all this with those company-provided phones.
They also, no doubt, make and receive some personal calls, emails and texts. As long as it doesn’t rack up the bills (we buy enough minutes to prevent any problems) or get in the way of work, I don’t care.
The IRS, however, does care. Maybe. Sometimes. I think. Even with a recent legislative “fix,” the rules governing personal use of company-issued cell phones are an archaic mess, rooted in a time more than two decades ago when a cell phone was a luxury item rather than a business necessity.
One small step forward came with the Small Business Jobs Act that President Obama signed into law on Sept. 27. The law removes cell phones from the Internal Revenue Code’s definition of “listed property.”
“Listed property” consists of items that are likely to be purchased by businesses but which lend themselves to personal use. Companies must prove that the items are primarily used for business purposes to be allowed to deduct these purchases as ordinary business expenses, according to accelerated depreciation rules. This makes sense for something like a car, which is likely to suffer substantial wear and tear due to personal use. Cell phones were added to the definition of listed property in 1989, and they remained on the list until this month.
The new law did not resolve the question of whether, and how, personal use of a business cell phone should be taxed. The IRS retains authority to determine whether personal cell phone use must be treated as a taxable benefit.
If the IRS insists that personal use of a business cell phone is a taxable form of compensation, employers must somehow track and determine the fair market value of minutes used for personal purposes. Imagine payroll clerks all over America scanning company cell phone bills (our small firm’s statements are hundreds of pages long), identifying each number as business or personal, and entering it into the computer. It would certainly help bring down unemployment, at least until businesses go broke or throw their phones in the trash.
As I wrote last year, the treatment of personal use of an employer-provided cell phone as a taxable benefit is antiquated and unreasonable. Having a cell phone and a laptop to use on the road is now as essential in many industries as having a desk phone and a PC to use in the office. The Small Business Jobs Act did not affect laptops, which continue to be listed property, subject to even stricter recordkeeping requirements than those that will now govern cell phones.
The Joint Committee on Taxation estimates that removing cell phones from the listed property definition will cost $410 million over 10 years. A newsletter from the law firm Morgan, Lewis & Bockius LLP comments that this seems to be “a very low number considering the wide proliferation of cell phones.” However it’s hard to believe that many taxpayers were actually complying with the old restrictions. This means that, whatever money the IRS has been getting from treating cell phones as listed property, it’s been getting it exclusively through selectively enforcing the issue on audits.
Most likely the IRS agents conducting those audits could have brought in more money by dedicating their time to more productive avenues of examination, rather than examining cell phone bills. Enforcing the rules, therefore, may have actually been costing the government money. Selective enforcement through audits is also fundamentally unfair, since only those who have the bad luck to get audited actually pay the tax, while others are permitted to blissfully ignore it.
Given a chance to do something to make the tax code slightly more rational, Congress did what it often does: It punted. Congress should have brought reality, common sense and the tax laws into a rare harmony by declaring that employer-provided cell phones and other business equipment, like laptops, are not taxable benefits to employees as long as the equipment is primarily intended and used for business purposes.
I hope that, while they’re out on the campaign trail, the members of Congress remember to track each call they make on their cell phones. And no, calling your spouse to whine about hardships of being a politician doesn’t count as a business call.
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