ISSUE:
Reimbursing business use of cell phones is generally not income to the employee. Thanks to a somewhat neglected change in the tax law, now it looks like computers, laptops, and other peripheral equipment are treated likewise.
SITUATION:
Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii). They are required to file Form 990 annually.
While we were on-site at DCC, preparing their Form 990 and Form 990-T for the year ended June 30, 2017, their CFO asked us about “listed property.”
“Do we have to get some type of checklist from each employee that we reimburse monthly for cell phone use? It seems like I remember that from a few years ago,” he asked.
We told him, “Generally, No. There was a requirement for that for a time, but Congress “de-listed cell phones in 2010. And, the new tax law (“Tax Cuts and Jobs Act”) has a provision that makes ‘computer or peripheral equipment’ no longer listed property.
We tell DCC’s CFO that it would appear that the treatment for no-longer-listed computer property used for business would be treated in a like manner to the treatment of cell phones used for business purposes (not taxable to the employee and not subject to the automatic excess benefit rules).
“RULES:”
Section 13202, “Tax Cuts and Jobs Act” (conforming with the Senate Amendment):
The provision removes computer or peripheral equipment from the definition of listed property. Such property is therefore not subject to the heightened substantiation requirements that apply to listed property.
IRS “Memorandum for all Field Examination Operations” (dated September 14, 2011):
Notice 2011-72 addresses the tax treatment of employer-provided cell phones for noncompensatory purposes. The Notice provides that, for tax years after December 31, 2009, the IRS will treat the employee’s use of employer-provided cell phones for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s income. However, the cell phone must be issued primarily for noncompensatory business reasons. For purposes of determining whether the working condition fringe benefit provision in § 132(d) applies, the substantiation requirements that must be satisfied by the employee for an allowable deduction under § 162 are deemed to be satisfied. Additionally, any personal use of the employer-provided cell phone will be treated as a de minimis fringe benefit, excludable from the employee’s gross income under § 132(e) of the Code.
Notice 2011-72 does not address the treatment of reimbursements received by employees from employers for the business use of an employee’s personal cell phone.
In cases where employers, for substantial noncompensatory business reasons, require employees to maintain and use their personal cell phones for business purposes and reimburse the employees for the business use of their personal cell phones, examiners should analyze reimbursements of employees’ cell phone expenses in a manner that is similar to the approach described in Notice 2011-72. Specifically, in cases where employers have substantial business reasons, other than providing compensation to the employees, for requiring the employees’ use of personal cell phones in connection with the employer’s trade or business and reimbursing them for their use, examiners should not necessarily assert that the employer’s reimbursement of expenses incurred by employees after December 31, 2009, results in additional income or wages to the employee. However, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone must not be a substitute for a portion of the employee’s regular wages. Arrangements that replace a portion of an employee’s previous wages with a reimbursement for business use of the employee’s personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses should be examined more closely.
BOTTOM LINE:
- Many CFOs and Controllers are under the impression that they still need to obtain a “phone checklist” each year from employees for tax purposes – generally not true.
- The new tax law removed “computers or peripheral equipment” from I.R.C. section 280F (listed property).
- Now providing (or reimbursing for) cell phones, tablets, laptops, computers, printers (even fax machines!) to employees for “substantial noncompensatory” business uses should not result in taxable income to the employee.
- It appears that computers, like cell phones before them, will not be an “automatic excess benefits” issue for disqualified persons – but beware of “over-reimbursements.”
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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