For an example of genuine tax simplification, it would be hard to beat a provision in the recently enacted 2010 Small Business Jobs Act. For the last several years, just about everyone, it seems, even the IRS, has complained about the archaic rules governing the tax treatment of employer-provided cell phones.

Since 1989 (shortly after the first cell phones were introduced), employers and employees have been required to keep a detailed log of business and personal use on employer-provided cellular telephones and similar mobile communication devices to substantiate costs that were allowable as business expenses. In tax parlance, cell phones were included in the category of “listed property” (i.e., items obtained for use in a business but which lend themselves easily to personal use) and thus were subjected to strict substantiation rules. Employers who failed to meet the substantiation requirements couldn't deduct the costs of the cell phones, and employees who failed to meet the substantiation rules saw the amount that represented personal use of the cell phone counted as taxable wages (instead of a tax-free working condition fringe). Why the strict rules for cell phones? Back in 1989, cell phones were considered an expensive luxury item only used by executives, and Congress believed that an employee's use of an employer-provided cell phone to make personal calls should be treated as a taxable fringe benefit, similar to an employee's personal use of an employer-provided automobile.

Needless to say, times have changed. No longer considered a luxury item, cell phones and other mobile communication devices are now part of daily business practices at all levels, and the deduction limitations and documentation requirements no longer make sense. Today, cell phones are more akin to a land line phone which for years an employee may have occasionally used to make a personal call without tax consequence. Detailed documentation is not required for use by an employee of his office phone, and there is no reason that cell phones should be subject to stricter substantiation requirements. You may have read in the news that the IRS Commissioner and Treasury Secretary joined in a statement urging Congress to repeal the law. “The passage of time, advances in technology and the nature of communication in the modern workplace,” the Commissioner said, “have rendered this law obsolete. [We] ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers.”

And lo and behold, that is precisely what Congress has done. The new legislation removes cell phones and similar telecommunications equipment (including PDAs and Blackberry devices) from the “listed property” rules. This makes it easier for employers that provide cell phones to employees, as well as for employee who use their own cell phones. As with other business property, taxpayers must still be able to demonstrate the business use of the cell phone.

We hope this information is helpful. If you would like more details about any aspect of the new legislation, please do not hesitate to contact us.