Background. This is the second in a series of three articles addressing the use of cell phones by church staff. The first article in this series appeared in the July 2000 issue of Church Treasurer Alert. It addressed two important limitations that are imposed by the tax code on the business use of cell phones by employees: (1) the phone must be for the “convenience of the employer,” and (2) the phone must be a “condition of employment.” As a table in this newsletter demonstrates, these requirements apply to employee-owned cell phones, and must be met in order for an employee to deduct the entire cost of a cell phone in the year of purchase and to claim a tax deduction for the business use of the phone. In addition, these requirements must be met in order for a church to reimburse an employee’s business use of his or her own cell phone under an accountable arrangement.
Key point. The tax treatment of cell phones is complex. A table in this newsletter summarizes all of the rules. Use this handy resource to quickly answer most of the important tax questions.
Use of Cell Phones by Church Employees: The Tax Consequences Who owns the phone?Tax consequences?Recommendation
| Church | Depends on whether the arrangement is accountable or nonaccountable:
• Nonaccountable plan. The church requires no substantiation of the “business use percentage” (the percentage of total phone time that is devoted to business). The church must report the full amount of all monthly usage bills that it pays as taxable income to the employee on Forms W-2 and 941. If the user is not a minister (or a minister who has elected voluntary tax withholding) then the church also must withhold taxes on the reported amounts. • Accountable plan. The church requires the user to keep a diary, log, or other record documenting the duration and business or personal nature of each call. From this data the church can determine the “business use percentage” (the percentage of total phone time that is devoted to business). This percentage is multiplied times each monthly bill, and the resulting amount is not reported as taxable income to the employee since business use has been properly “accounted for.” The church can reimburse only the business use percentage of each bill, or it can pay the entire amount. If it pays the entire amount, then the reimbursements in excess of substantiated business use represent taxable income. The church must report these excess payments as taxable income to the employee on Forms W-2 and 941. If the user is not a minister (or a minister who has elected voluntary tax withholding) then the church also must withhold taxes on the reported amounts. Be sure the church pays cell phone charges under an accountable arrangement that requires employees to substantiate the business use percentage. | Be sure the church pays cell phone charges under an accountable arrangement that requires employees to substantiate the business use percentage. |
| Employee |
Cell phone depreciation
An employee can claim a “section 179” deduction (on Form 2106) for the cost of the phone in the year of purchase if 3 requirements are met: • Business use. The employee uses the phone more than 50% of the time for business. The “section 179” deduction is for the cost of the phone multiplied times the business use percentage. If business use does not exceed 50%, the employee can depreciate the cost of the phone over 5 years.) • Condition of employment. The use of the phone must be required for the employee to perform duties properly. The employer does not have to explicitly require the employee to use the phone. A mere statement by the employer that the use of the phone is a condition of employment is not sufficient. • Convenience of the employer. The use of a cell phone by an employee is for the convenience of the employer if it is for a substantial business reason of the employer. The use of the phone during the employee’s regular working hours to carry on the employer’s business is generally for the employer’s convenience. Employees should be urged to keep adequate records to prove that the business use percentage exceeds 50%. This will allow a deduction for the cost of the phone (multiplied times the phone’s business use percentage) in the year of purchase. | Employees should be urged to keep adequate records to prove that the business use percentage exceeds 50%. This will allow a deduction for the cost of the phone (multiplied times the phone’s business use percentage) in the year of purchase. |
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Monthly cell phone user fees: • Church pays (reimburses) the monthly fees. Tax treatment depends on whether the reimbursement arrangement is accountable or nonaccountable (defined above). (1) If accountable, and the “condition of employment” and “convenience of employer” tests (defined above) are met, the church’s reimbursements of expenses associated with substantiated business use of the phone are not reported as taxable income to the employee. (2) If nonaccountable, or if the “condition of employment” and “convenience of the employer” tests are not met, the church’s reimbursements must be reported as taxable income to the employee and the church may need to withhold taxes on the amount reported. This same rule applies to any reimbursement of personal cell phone use in excess of substantiated business use. • Employee pays all monthly fees (no church reimbursement). The employee can claim a business expense deduction (computed on Form 2106) for the business use of the phone, if: (1) the employee has adequate records to prove the business use percentage of the phone; (2) the deduction is limited to the business use percentage multiplied times all monthly charges; (3) the “condition of employment” test (defined above) is met; and (4) the “convenience of the employer” test (defined above) is met. The church requires an accounting of the business use of the phone, and reimburses charges allocable to that use only. | The church requires an accounting of the business use of the phone, and reimburses charges allocable to that use only. |
Substantiation requirements. An additional requirement applies to the business use of cell phones whether they are owned by the church or an employee—the business use of the cell phone must be substantiated in accordance with strict requirements spelled out in the tax code. This section explains and illustrates this important requirement.
Employees cannot deduct the purchase cost of their cell phones, or any portion of monthly user charges they pay, unless they maintain adequate records. In addition, adequate records proving the business use of a cell phone are required in order for the church to reimburse these expenses under an accountable arrangement.
Adequate records must show the time, place, business purpose, and amounts of these expenses. Generally, you must also have receipts for any expense of $75 or more. To meet the adequate records requirement, an employee must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with a receipt, is sufficient to establish each element of an expenditure or use. Information need not be recorded in an account book, diary, or similar record if the information is already shown on a receipt. For example, a monthly invoice from a telephone company ordinarily will show the amount of the expense and the “time” (month) during which the calls were made. However, the invoice will not show the business purpose of the calls, and so this information must be provided by the user.
An employee’s records must support all of the following:
(1) The amount of each separate expense, such as the cost of acquiring the phone, maintenance and repair costs, and any other expenses.
(2) The amount of each business use (based on an appropriate measure, such as time), and the total use of the property for the tax year.
(3) The date of the expenditure or use.
(4) The business purpose for the expenditure or use.
Employees must record the elements of an expenditure or use at the time they have full knowledge of those elements. An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business it is given by an employee to the employer.
An adequate record of business purpose must generally be in the form of a written statement. However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. This ordinarily is not possible with cell phones.
If any of the information on the elements of an expenditure or use is confidential, the employee does not need to include it in the account book or similar record if it is recorded at or near the time of the expenditure or use. However, it must be retained by the employee and made available to the IRS district director upon request. This rule may apply to some calls made by ministers.
Employees can maintain adequate records for portions of a tax year and use that record to support business use for the entire tax year if it can be shown by other evidence that the periods for which adequate records were maintained are representative of use throughout the year.
Key point. The substantiation requirements must be met not only by employees wanting to claim a tax deduction for the business use of their phone that is not reimbursed by the church, but also by the church in reimbursing expenses under an accountable arrangement. The requirements are identical.
Self-employed workers. Some ministers and lay church workers are self-employed for income tax reporting purposes. Note the following rules that apply to these workers:
- The table reproduced in this article addresses the use of cell phones by employees, not self-employed workers.
- If the church owns a cell phone used by a self-employed worker, this can be used by the IRS as evidence that the worker in fact is an employee for income tax reporting purposes.
- If the church owns a cell phone used by a self-employed worker, and pays the monthly user fees, then the church must report these payments as taxable income to the worker (on Form 1099) if the arrangement is nonaccountable. If the arrangement is accountable, then the payments are not reported as taxable income to the worker. See the table for definitions of nonaccountable and accountable reimbursement arrangements.
- If the worker owns the phone, he or she may deduct the cost of the phone in the year of purchase if the phone is used more than 50% for business. This is referred to as the “section 179 deduction.” The “condition of employment” and “convenience of the employer” requirements do not apply. Only the percentage of cost that corresponds to the “business use percentage” of the phone may be deducted in the year of purchase. For example, if the worker’s records show that the phone is used 75% of the time for business, then 75% of the cost of the phone can be deducted in the year of purchase.
- If the worker owns the cell phone, then the monthly user fees can be claimed as a tax deduction if the worker pays them and maintains adequate records. The deduction is reported on Schedule C (Form 1040). The “condition of employment” and “convenience of the employer” requirements do not apply.
- If the worker owns the cell phone, and monthly user fees are paid or reimbursed by the church, the reimbursements are not reported as taxable income to the worker so long as the church’s reimbursement arrangement is accountable. See the table for details. Note that the reimbursement of business expenses by an employer under an accountable arrangement can be used by the IRS as evidence that the worker in fact is an employee for income tax reporting purposes.
- If the worker owns the cell phone and does not maintain adequate records of business use, then no tax deduction is available.
Key point. The concluding article in this 3-part series on cell phones will appear in the October 2000 issue of Church Treasurer Alert.
