By Philip J. Castrogiovanni, Ralph E. DeJong, and Michael N. Fine
New legislation, which takes effect immediately, simplifies
substantiation rules for employer-provided cell phones and other similar
On Monday, September 27, 2010, President Obama signed the Small Business Jobs Act of 2010.
The projected $42 billion measure passed by Congress simplifies
substantiation rules for cell phones and other similar
telecommunications equipment (e.g., PDAs and Blackberries), an area of long-standing concern for employees and employers. Because it applies for tax years beginning after December 31, 2009, the act's relief takes effect immediately.
Legislative History and Background
Cellular phones have been "listed property" since 1989 under the Internal Revenue Code, as amended (the Code).
Accordingly, more stringent substantiation rules had to be satisfied
for an employer to fully deduct the costs of cell phones and for
employees to fully exclude the value of cell phones from taxable income.
Conflicting and confusing guidance did not provide clear rules for
determining the taxation or deduction of an employee's personal cell
phone usage. Coupled with inconsistent enforcement and a
disproportionate strain on capital given the relative value of such
benefits, employers have long requested that employer-provided
cell-phones be delisted as property the personal use of which will be
taxable to the employee.
The act was introduced in the U.S. House of Representatives May 13, 2009.
Following various revisions, including a name change, it was approved
by the U.S. Senate September 16, 2010, and referred back to the House of
Representatives, which approved it September 23, 2010, by a vote of 237
to 187 (with nine abstentions). Included in the Small
Business Jobs Act is language from the MOBILE Cell Phone Act of 2009,
addressing the taxation of employer-provided cell phone usage by
employees. While the principal purposes of the act are to
address perceived needs of small businesses, many provisions apply to
large employers including the act's relief for cell phone
Delisting Cell Phones
Section 2043 of the act removes cellular telephones and similar
telecommunications equipment from the Code's definition of "listed
property." Therefore, cell phones are no longer subject to the Code's
onerous substantiation requirements and special depreciation rules for
listed property. According to the Senate Committee on Finance's
summary, this provision is estimated to cost $410 million over 10 years.
Code Section 280F(d)(3) states that only to the extent that an item
of listed property is provided for the exclusive benefit of the employer
will it be eligible as a deductible expense to the employee.
In other words, if the employee uses a portion of any item of listed
property for his or her own benefit, the extent to which the item is
used by the employee for personal reasons is taxable to the employee. Only the business usage of the item is deductible to the employee. Such business usage must be substantiated to qualify for deduction.
Cell phones' listed status resulted in significant consternation for
employers and employees alike because it required some mechanism for
charging back a portion of employer-provided technology to the employee
for his or her personal use. Inadequate guidance in the
area, coupled with intense Internal Revenue Service interest in the
topic, often forced employers to develop their own means of either
charging employees for personal use of cell phones or assigning an
amount of taxable compensation for any personal use. The
most draconian approaches required employees to keep detailed logs of
their personal use, while even less intrusive measures, such as charges
based on estimated use, still resulted in taxable income to the
employee. Those who opposed these "charge backs" argued
that employees were not charged to use their desk telephones for
personal calls, so they should not be charged to use cell phones either.
Now employees will no longer need to keep detailed records to track
their cell phone usage. This makes it easier for employees to exclude
the value of employer-provided cell phones from their taxable income
under the Code's working condition fringe benefit rules.
Employees exclude working condition fringe benefits from their personal
income when they can personally deduct those benefits as "ordinary and
necessary" business expenses under Section 162 of the Code.
By removing this category of items from the listed property
definition, cell phones are no longer subject to Code Section
280F(d)(3). This means that limited personal usage of
these employer-provided items is less likely to yield taxable income for
employees, and that employees need not demonstrate their use is for the
convenience of their employer and required as a condition of their
employment. Presumably, if an employer gifted an employee a
cell phone and cell phone service, with no expectation that the
employee would use the phone for work, then the phone and the monthly
charge for the phone would continue to be treated as a taxable item to
Lastly, according to the Joint Committee on Taxation's report, the
act gives the U.S. Treasury Department discretion to determine whether
personal use of cell phones that are provided primarily for business
purposes may qualify as a de minimis fringe benefit under Section
132(e), the value of which is so small as to make accounting for it
unreasonable or administratively impracticable.
What Should Employers Do Now?
Employers should review their current cell phone policies to
determine whether any changes should be made to account for the act's
stipulations. While employers could choose to charge
employees some amount to reflect their personal use of an
employer-provided cell phone, employers will no longer be required to
treat an employee's personal use of the employer-provided cell phone as a
Because this relief is retroactive to tax years beginning after
December 31, 2009, employers may want to revisit their policies in light
of this requirement and determine whether administrative considerations
favor delaying changes to existing policies until another date.
For example, an employer that has been imputing cell phone cost to
employees during 2010 may elect to wait until 2011 to change its program
so as not to affect current accounting requirements.
Alternatively, the employer could reverse any charge or other impact on
the employee, which would likely be welcome given the current economic
Philip Castrogiovanni is a partner in the law firm of McDermott Will
& Emery LLP and is based in the Firm's Chicago office. He focuses
his practice on matters pertaining to executive compensation, employee
benefits and corporate governance.
Ralph E. DeJong is a partner in the law firm of McDermott Will & Emery LLP and is based in its Chicago office. He focuses his practice on the compensation, executive benefits and employee benefits of tax-exempt organizations.
This includes designing and preparing deferred and incentive
compensation arrangements, leading governing boards in the review and
approval of executive and physician compensation arrangements,
negotiating and preparing executive and physician employment agreements,
and analyzing the private inurement and intermediate sanctions
implications of executive and physician compensation and benefit
arrangements. He serves as executive compensation
counsel to the board-level compensation committees of many hospitals,
health systems and other tax-exempt organizations.
Michael N. Fine is an associate in the law firm of McDermott
Will & Emery LLP and is based in the Chicago office. He focuses his
practice on issues affecting tax-exempt health care organizations,
including corporate governance, executive compensation, intermediate
sanctions, joint ventures, charitable contributions and obtaining tax
exemption from the IRS. Michael has experience representing exempt organizations under IRS audit and advising tax-exempt health care providers on captive insurance and other alternatives to commercial insurance.
The content of this article is
provided solely for informational
purposes: It is not intended as, and does not constitute, legal advice.
The Information contained herein should not be relied upon or used as a
substitute for consultation with legal, accounting, tax, career, and/or
other professional advisors. This article is provided "AS IS," and
McDermott Will & Emery makes no representation or warranty of any
kind with respect to its contents. McDermott Will & Emery expressly
disclaims all representations and warranties, whether express or
implied, including, but not limited to, warranties of merchantability,
fitness for a particular purpose, and non-infrengement. In addition,
McDermott Will & Emery does not represent or warrant that the
content of thsi article is timely, accurate or complete.
This article is republished with
the permission of McDermott Will
& Emery LLP. Further duplication without the permission of McDermott
Will & Emery LLP is prohibited. All rights reserved.
Discover the features and benefits of LexisNexis® Tax Center
For quality Tax & Accounting research resources, visit the LexisNexis® Store