The Small Business Jobs Act of 2010 was recently signed into law by President Obama. A relatively minor provision of this legislation included a long awaited removal of cell phones from the so-called "listed property" category under federal tax law. Listed property, as defined in Internal Revenue Code section 280F(d)(3), requires strict record keeping in order for an employer to be able to fully deduct it and for employees to fully exclude the value from taxable income. Internal Revenue Code Section 280F(d)(3) provides that an item of listed property can only be treated as a deductible expense by an employee if it is for the "convenience of the employer and required as a condition of employment." Prior to the change in the law, when employees used their cell phones for their own benefit, it was considered taxable to the employee. Onerous record keeping, such as a personal use log, was required in order for an employee to be able to exclude the business use of the phone from income. For nonprofit tax-exempt organizations, the problem was compounded by the fact that listed property that is not properly substantiated and reported is considered an automatic excess benefit transaction and may subject the individual using it to intermediate sanctions. Needless to say, since cell phones are now common place, with many employees expected to have round the clock availability and unlimited calling plans are readily available, applying the listed property rules for employer provided cell phones was obsolete and burdensome.
Although regulations and IRS interpretation have yet to be worked out, it is clear that personal use of an employer-provided phone will no longer automatically create taxable income to employees, any more than personal use of a land line phone would. Similarly, for employees of 501(c)(3) exempt organizations, personal use will not create an automatic excess benefit transaction. It should be clarified, though, that the law change doesn't exclude the possibility that an employer provided cell phone could be taxable income to an employee. For example, if an employer provided a cell phone and calling plan with no expectation that the phone would be used for work, it would still be taxable to the employee as income. Similarly, depending on the circumstances, a cell phone provided by a nonprofit to an employee could also still be an excess benefit transaction and subject to intermediate sanctions. Tax-exempt 501(c)(3) organizations who provide employees cell phones should review and revise their policy with regard to employee cell phones accordingly.