Background. Over the past few years several churches have provided their senior pastor with a cell phone. Many of these churches provide cell phones to other staff members as well. There is no doubt that such phones are a tremendous convenience, and make a pastor accessible in the event of emergencies. But few pastors, or church treasurers, have a clear understanding of the tax implications associated with the use of these phones. Consider the following:
- The tax code treats cell phones as “listed property,” meaning that expenses associated with the use of such phones cannot be deducted by an employee or reimbursed by an employer under an accountable arrangement unless they are provided for the “convenience of the employer,” they are a “condition of employment,” and strict substantiation requirements are met.
- Who keeps the cell phone when the employee no longer works for the church?
- What is the effect of church-provided cell phones on the reporting status (employee or self-employed) of church staff?
- What safety concerns are associated with the use of cell phones?
- What, if any, impact do cell phones have on the clergy-penitent privilege?
- What rules apply to the use of cell phones by self-employed church workers?
This article will address the first issue—the implications of cell phones being “listed property” under the tax code. The next issue of Church Treasurer Alert will complete the analysis of the first issue, and then address the other issues.
“Listed property”
Section 280F of the tax code imposes stricter substantiation requirements on the business use of certain kinds of property. The code refers to these kinds of property as “listed property,” and for many years the list has included automobiles and personal computers. In 1989, Congress added cell phones to the list. A committee report to the 1989 law states:
The bill expands the definition of listed property to include cellular telephones and other similar telecommunications equipment. Thus, if … an individual buys or leases a cellular telephone or other similar telecommunications equipment that is used by the individual in connection with the performance of services as an employee, no deduction for any business use is allowed unless the business use of the equipment is for the convenience of the employer and required as a condition of employment. Finally, no deduction is allowed with respect to such equipment unless the taxpayer either maintains adequate records or provides other sufficient evidence that establishes the amount of business use, investment use, and personal use of the equipment.
This language identifies three important conditions that must be met in order to treat an employee’s use of a cell phone as a business expense:
(1) the employee’s use of the phone is for the convenience of the employer
(2) the employee’s use of the phone is required as a condition of employment, and
(3) the employee adequately substantiates the business use of the phone
These conditions apply not only to the deductibility of an employee’s use of a cell phone in the course of his or her business, but also to the reimbursement of the cost of such phones by employers under an accountable business expense reimbursement arrangement. As a result, it is very important for church treasurers to be familiar with these rules.
Key point. Church treasurers should be familiar with the following tax consequences of failing any one or more of the three conditions that apply to the use of a cell phone by an employee: (1) the employee cannot claim an employee business expense for any portion of the cost of using the cell phone that he or she pays (i.e., the cost of the cell phone is an unreimbursed expense); (2) the church cannot reimburse any portion of the cost of the cell phone under an accountable business expense reimbursement arrangement; (3) any expenses associated with the cost and use of the cell phone paid by the church must be treated as “nonaccountable” reimbursements, meaning that they must be reported as taxable compensation to the employee (and included on his or her W-2 form); and (4) in the case of nonminister employees the church must withhold income taxes and FICA taxes from the amount of its reimbursements of cell phone expenses.
Let’s look at each of the three conditions that must be met in order to treat cell phone expenses as a business expense.
#1—Convenience of the employer
When is a cell phone used for the convenience of one’s employer? The income tax regulations note:
In order to satisfy the “condition of employment” requirement, the use of the property must be required in order for the employee to perform the duties of his or her employment properly. Whether the use of the property is so required depends on all the facts and circumstances. Thus, the employer need not explicitly require the employee to use the property. Similarly, a mere statement by the employer that the use of the property is a condition of employment is not sufficient.
The regulations also clarify that the term “convenience of the employer” generally has the same meaning as it does under section 119 of the code, which excludes from taxable income meals or lodging “furnished for the convenience of an employer.” Section 119 provides that meals furnished by an employer without charge to the employee will be regarded as furnished for the convenience of the employer if the meals are furnished for a substantial “noncompensatory business reason” of the employer. If an employer furnishes meals as a means of providing additional compensation to an employee, the meals so furnished will not be regarded as furnished for the convenience of the employer. On the other hand, if the employer furnishes meals to an employee for a substantial noncompensatory business reason, the meals will be regarded as furnished for the convenience of the employer. The income tax regulations list a number of examples of meals that are provided to employees for “substantial noncompensatory business reasons,” including the following two:
(1) The “emergency” rule. Meals furnished to employees during working hours in order to have them available for emergency calls during their meal period are one example of a substantial noncompensatory business reason. To satisfy this test, the regulations caution that “it must be shown that emergencies have actually occurred, or can reasonably be expected to occur, in the employer’s business which have resulted, or will result, in the employer calling on the employee to perform his job during his meal period.”
(2) The “no adequate facilities available” rule. Another example of a substantial noncompensatory business reason are meals furnished to employees during working hours because they could not otherwise secure meals within a reasonable meal period. For example, meals may qualify under this rule when there are insufficient eating facilities in the vicinity of the employer’s premises.
Key point. In summary, for a cell phone to satisfy the “convenience of the employer” requirement, it must meet two requirements: (1) It must be required in order to the employee to properly perform his or her job; and (2) it must be provided for a substantial noncompensatory business reason, such as the immediate accessibility of the employee in the event of an emergency, or the inadequacy of the employee’s office telephone.
Let’s apply the “convenience of the employer” rule to the use of cell phones by church employees.
Example 1. Pastor B is the senior pastor of his church. His church provides Pastor B with a telephone in his church office, and it also provides him with a cell phone. There is little doubt that the cell phone is for the convenience of Pastor B’s employer since it is needed for him to properly perform his job and it is provided to him for substantial noncompensatory business reasons. In particular, it meets the “emergency rule” since the cell phone makes Pastor B accessible in the event of an emergency (such as the sudden death or hospitalization of a church member) during those frequent times when he is not in his church office, and, it meets the “no adequate facilities available” rule since the telephone provided by the church in Pastor B’s office is not an adequate means of reaching him when he is not in his office.
Example 2. A church provides its bookkeeper with a cell phone. The bookkeeper rarely leaves her office for business purposes and the church provides her with a telephone in her church office. The cell phone is not for the convenience of the employer since it is not necessary in order for her to properly perform her job and there is no substantial noncompensatory business reason for her to have it. The “emergency rule” probably cannot be met, since it is unlikely that emergencies will occur that would require the bookkeeper to be contacted immediately on a cell phone. This is so for two reasons. First, it is rare for emergencies to occur that will require the immediate assistance of a bookkeeper, and second, since she rarely leaves her office during business hours, the telephone the church provides in her office is sufficient. As a result, providing the cell phone to the bookkeeper does not have a substantial noncompensatory business purpose and so it is not for the convenience of the employer. Church treasurers should be familiar with the following tax consequences of failing the “convenience of the employer” test: (1) the employee cannot claim an employee business expense for any portion of the cost of using the cell phone that she pays (i.e., the cost of the cell phone is an unreimbursed expense); (2) the church cannot reimburse any portion of the cost of the cell phone under an accountable business expense reimbursement arrangement; (3) any expenses associated with the cost and use of the cell phone paid by the church must be treated as “nonaccountable” reimbursements, meaning that they must be reported as taxable compensation to the employee (and included on her W-2 form); and (4) in the case of nonminister employees the church must withhold income taxes and FICA taxes from the amount of its reimbursements of cell phone expenses.
Example 3. A church provides its office secretary with a cell phone. The secretary rarely leaves her office for business purposes and the church provides her with a telephone in her church office. The analysis in example 2 would apply to this example.
Example 4. A church provides its custodian with a cell phone so that he can be reached wherever he is on church premises. The cell phone may or may not be for the convenience of the employer, depending on the circumstances. In particular, consider the following: (1) How easy is it for the church to locate the custodian while he is on church premises? This task generally is much easier in smaller churches. On the other hand, many larger churches have an intercom system or other communications device that makes it easy to locate a custodian. The easier it is to locate the custodian, the less likely the cell phone will be for the convenience of the employer. (2) How often does the custodian have to be away from church property in the performance of his duties? The less often he is away from church premises in the performance of his job, the less likely a cell phone will be for the convenience of the employer. (3) If the custodian occasionally has to be away from church premises to perform his job, how often and for how long is he away? If he is away from church property infrequently in the performance of his duties, it is unlikely a cell phone will be for the convenience of the employer. (4) Have there ever been any emergencies at the church requiring immediate communication with the custodian? Can such emergencies reasonably be foreseen? If not, it will be difficult to prove that the cell phone was provided for a substantial noncompensatory business purpose, or that it is required in order for the custodian to reasonably perform his duties. (5) Why aren’t the telephones available at church adequate for the custodian to perform his job? If the cell phone does not meet the “convenience of the employer” test, the tax consequences summarized in example 2 will apply.
Example 5. A church provides its music director with a cell phone. She is not a credentialed minister. The cell phone may or may not be for the convenience of the employer, depending on the circumstances. In reaching a decision, it will be helpful to apply the five questions noted in example 4. If the cell phone does not meet the “convenience of the employer” test, the tax consequences summarized in example 2 will apply.
Example 6. A church provides its business administrator with a cell phone. He is not a credentialed minister. The cell phones may or may not be for the convenience of the employer, depending on the circumstances. In reaching a decision, it will be helpful to apply the five questions noted in example 4. If the cell phone does not meet the “convenience of the employer” test, the tax consequences summarized in example 2 will apply.
#2—Condition of employment
The second condition that must be met in order to treat an employee’s use of a cell phone as a business expense is that use of the cell phone is required as a “condition of employment.” This condition is very similar to the “convenience of the employer” requirement. In fact, the Tax Court has ruled that they are basically the same test. U.S. Junior Chamber of Commerce v. Commissioner, 334 F.2d 660 (Ct. Cl. 1964). At a minimum, the “condition of employment” requirement means that a cell phone is necessary in order for a church employee to perform his or her job. Once again, it is not necessary that a church explicitly requires an employee to use a cell phone. On the other hand, it is not enough that a church merely states that an employee’s use of a cell phone is a condition of employment.
If a cell phone does not meet the “condition of employment” test, the tax consequences summarized in example 2 will apply.
Tip. The income tax regulations state that an employer need not “explicitly require” the employee to use a cell phone in order to meet the “convenience of the employer” test, and that “a mere statement by the employer that the use of the property is a condition of employment is not sufficient.” However, a resolution of the church board to the effect that a cell phone is being provided to certain employees in order to enable them to properly perform the requirements of their job would increase the likelihood that the IRS would consider a cell phone to be for the employer’s convenience. We recommend this practice.
This article will be continued in the next issue of Church Treasurer Alert.