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2010 Tax Countdown – NEW Law Regarding Cell Phone Deduction

11/28/2010

The Small Business Jobs Act of 2010, passed on September 27, 2010 offers new and extended tax assistance for America’s small and self-employment businesses. I will be posting a number of blogs covering the highlights. Here is the first:

The new act promises simplification of record-keeping rules for business cell phone use. YAY!… I think.

OLD WAY: You have heard me explain over the years that the IRS will allow only business calls on your cell phone and that means that you have to keep all of your bills, highlight your business calls, and write in who the call was with along with the reason for the call. The highlighted and explained lines are then deductible. If you have employees to whom you have given company cell phones, they must turn in their records to you and then only the business related calls are deductible. Their personal calls constitute compensation – taxable income to the employee. This has been a pain. No wonder small employers have been hammering away at their Congress people to get this changed.

NEW WAY: Retroactive for all of 2010, cell phones and other similar devices (ie blackberries) are no longer subject to the time-consuming and overarching record-keeping rules of yore.

WARNING: But before you phone home the good news, please note — doing away with heavy duty record keeping does NOT mean doing away with all record keeping. We do not yet have guidance on how the IRS will interpret this law. But because rules for fringe benefits and tax-free expense reimbursements remain in force, it can be assumed that a self employed person or an employee will have to substantiate business versus personal use and that employers may be able to establish personal use policies to ensure deductibility of cell phone use. Those policies will be determined by IRS interpretation of the new law. Congress mentioned that “if” personal use was minimal that the value could be excluded from the employee’s or self employed person’s income. We don’t know what that means, but I’m sure we will find out — eventually.

TO DO: So – what should you do now? We really don’t know yet, but here are some “common sense” thoughts (OK, tax law is not always driven by “common sense” – so proceed with CAUTION—and ask your CPA). Continue to maintain documents showing phone/device charges. Mark the personal calls. If the personal calls far outweigh the business calls, then you probably have a personal cell phone—it is NOT deductible (and if you are an employee with a company phone, it is probably TAXABLE). If you are an employee making mostly personal calls on a company phone, you have probably already had your cell phone privilege revoked in these tough economic times. If your personal calls on your biz phone represent a very small fraction of your total calls, then the whole cost of the cell phone is probably deductible. If it is, say, 80/20 biz/personal, then you may have some compensation income to acknowledge. Remember – this is MY interpretation, not the IRS interpretation. Important difference.

If you are a business owner who provides cell phones to your employees, you may want to talk to your CPA about establishing either an “accountable plan” or “unaccountable plan” for company cell phone use if you don’t already have one. If you have been charging your employees for their minimal personal use, you may want to reverse those charges before the end of the year—good news for your employees! But talk to your CPA before doing anything!

SO WHAT CHANGED? You used to have to keep track of the thousands of biz calls you made annually and now you only have to keep track of the dozens of personal calls…anyway, that is my read. The IRS will get around to supporting or rejecting my understanding.

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