Congress passes new rules for cell phones, but how much did the rules change?

• Author: Martin, Jeffrey A.

In today's environment, immediate access to information, e-mail, and clients has become essential to carrying on a business. Employers have responded by either providing their employees with cell phones (in which case the employer directly pays the cost of the cell phone plan) or reimbursing their employees for the cost of the cell phone plan (collectively referred to as an employer-provided cell phone). The employee's use of the cell phone results in taxable income to the employee unless certain requirements are met.

On September 27, 2010, President Barack Obama signed into law the Small Business Jobs Act of 2010, P.L. 110-240, which includes a provision that changes how tax law applies to an employee's use of an employer-provided cell phone. However, it is unclear whether this change provides the much-needed relief that many tax practitioners, employers, and the public desired.

Prior Law

Prior to the act, cell phones were included under the Sec. 280F definition of "listed property." Listed property refers to property specifically listed under Sec. 280F(d)(4), which is considered to inherently lend itself to personal use. Other listed property includes passenger automobiles and any other property used as a means of transportation; property generally used for entertainment, recreation, or amusement; and computers.

Under prior taw, in order to receive a deduction related to listed property for cell phones, the strict substantiation requirements of Sec. 274(d) had to be met. To meet these requirements, employees were required to give the employer monthly statements that set forth the amount of the expense (including the purchase price of the cell phone, monthly service charges, and any additional per minute, roaming, long-distance, or other operating charges), the time and date of each call, and the business purpose of each call. Employees were required to distinguish those calls that were personal in nature from those calls that were business related. Over the years, the IRS routinely raised the issue of cell phones in its audits, and the courts sustained the requirements of detailed substantiation for cell phones under Sec. 274(d).

Compliance with Sec. 274(d) was required not only for employers to obtain a deduction related to cell phones but also for employees to escape taxation on the business use of cell phones. The business use of & cell phone may be excluded from an employee's income as a working condition fringe benefit under Sec...