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Punch in tax breaks for cell phones

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in Small Business Tax,Small Business Tax Deduction Strategies

It’s often important for business owners and managers to keep in touch with employees via cell phone (or similar mobile devices), especially when workers often go out on a job.

Strategy: Set up a fringe benefit plan for cell phones. If tax law guidelines are met, the value of the benefit is tax free to employees and the cost is deductible by the company.

This type of fringe benefit plan was enhanced by changes included in the Small Business Jobs Act of 2010.

Here’s the whole story: Prior to the 2010 legislation, cell phones were considered to be “listed property,” subject to strict substantiation requirements like those imposed on vehicles and computer equipment. But now cell phones fall under the category of working condition fringe benefits. Thus, as long as you meet certain requirements, the benefit is tax free.

To qualify for this tax break, the employer must provide the cell phone to employees for “noncompensatory business reasons.” This means you must have a legit business purpose for furnishing cell phones to employees. According to the IRS, this occurs in the follow situations:

  • The employer needs to contact the employee at all times for work-related emergencies
  • The employer requires the employee to be available to speak with clients and customers at all times when the employee is away from the office
  • The employee needs to speak with clients located in other time zones at times outside of the employee’s normal work hours.

Similarly, if your company installs a plan for reimbursing employees when they use their personal cell phones for business purposes, the reimbursements are tax free. However, reimbursement amounts can’t exceed the amount of cell phone charges. Any excess reimbursement that isn’t returned to the employer becomes taxable income for the employee.

Also, the value of minimal personal use of an employer-provided cell phone provided primarily for noncompensatory business reasons is excluded from taxable income as a de minimis fringe benefit.

Caution: Without noncompensatory business reasons for providing cell phones, the employer must report the value of the cell phone use as taxable wage income. As such, the income is subject to federal employment taxes. This can occur, for example, if the employer is simply boosting morale among existing employees or attempting to attract new hires by providing free cell phones.

Finally, IRS examiners have been instructed to look for suspicious circumstances (e.g., where reimbursements appear to represent a year-end bonus).

Tip: As long as you stay within the tax law boundaries, your plan should pass muster.

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