Cellular Phones for Clergy

[Dave T]

Thought I heard something about this recently but don't remember the source.

We provide our pastors a cell phone and pay the bill to the cellular provider directly.

They do not keep a log of their calls and although the majority are church related, there is some personnal usage involved.

Aside from requiring them to log their calls how do we determine the portion of the monthly bill that is taxable income to them?

Seems that I heard that some type of allocation could be made based on an estimated percentage of personnal use but again don't remember the source.

Any help would be appreciated.

Thanks

- Dave T

[Margaret CPA in OH]

This doesn't answer your query directly but may be informative.

In the September issue of Church Finance, published by Christianity Today International, Richard Hammar JD, LLM, CPA, editor, a column addressed this. The question actually focused on usage of a church-provided computer but the answer extended to all listed property.

Without typing the entire response, the mention of "de minimus fringe benefit" led to the distinction between occasion use and usage several time each month for significant time. It goes on to say that "many employers, including many charities, have adopted "cell phone and internet usage" policies. And personal use is taxable. Cell phone usage substantiation is still stringent but the income recognition for personal use is the same. What several employers have done is to adopt a policy with the following features: (1) the employer no longer provides cell phones to any employee (after current contracts expire); (2) the employer grants employees (with a need for a cell phone) a monthly taxable stipend with which the employees can purchase and pay the monthly fees for their own cell phone; (3) the employer grants employees (with employer-provided internet access) a monthly stipend to cover the personal use of the internet. This is an increasingly popular way for employers to handle these issues."

I am a new member of our church administration committee and dealing now with both the internet access and cell phone usage. I have recommended that we follow these policies. We'll see how they are received and I will practice ducking quickly!

[MAMalody]

The IRS has this issue of cell phone business use under consideration. I believe they were going with 25%% personal and 75% business. We will see. Others probably have a better handle on this consideration than my memory, however.

[jainen]

>>I have recommended that we follow these policies. <<

Never mind the employees' individual tax situation. Think about what the church needs to protect itself. The trusting environment of a church makes it vulnerable to misuse of church property, which can sometimes raise issues of liability and control. Talk to your insurance agent about it. Pay the employees enough to buy their own phones and computers, then back up the data regularly. Be even more rigorous in your policy for volunteers.

[Margaret CPA in OH]

Thanks, Jainen, for your usual good advice. I don't consider the employees' individual tax situation myself and I don't think that is or will be an issue. You hit it with your second statement about the church protecting itself.

Unfortunately I am only one voice on this committee and one member. The latest issue, as of yesterday, is the pastor's desire to have wireless access throughout the church. I have already expressed my concern about data security with the existing situation and am very anxious about opening up access even more. At least my computer guy is the one who will evaluate the possibilities and cost and he knows my security concerns. We'll see how that goes!

I did get the administrator to back up the church software database twice weekly to our website, at least. But I still have angst with the volunteers using the computers.....

[kcjenkins]

An Article dated June 5, 2008 entitled "Listed Property - Are You Within the IRS Recordkeeping Requirements? " by Nancy Faussett, CPA found on the AICPA contains the following statement:

"Any cellular telephone or other similar telecommunications equipment. (As of the writing of this article, several bills had been introduced in Congress to remove cell phones from being included as listed property.)"

From Ed Zollars :

"As of right now nothing has been passed by Congress on this one, though supposedly they are again looking to attach it to a tax bill.

From what I've gathered, it appears the Tax Exempts branch of the IRS got all worked up over this one last year, and the issue kept being brought up by them based on the calls the AICPA was receiving. I'd also note the issue does come up in passing from time to time in Tax Court opinions, though normally "paired" with other Section 274 documentation issues--and the taxpayers don't fare real well in those cases."

Many of my clients use their cell phone for both business and personal. They don't have a second line. And when I tell them to keep track for 3 months, they were surprised that quite a bit of personal

use. Some do it some don't. It's an easy target in an audit, since the law has not been changed since cell phones first came out.

[kcjenkins]

Here's the latest article I found.

RS looking to ease cell phone recordkeeping requirements

An IRS spokesperson has indicated that IRS is looking to make it easier for taxpayers to comply with the IRS cell phone recordkeeping requirements.

Under Code Sec. 162(a) , individuals may take deductions for all ordinary and necessary expenses incurred in carrying on a trade or business. The expenses are considered tax-free working condition fringe benefits, subject to federal income tax withholding, FICA, and FUTA, if they are incurred by an employee on behalf of an employer.

Cell phones are currently included in the definition of "listed property," as defined in Code Sec. 280F(d)(4) . Expenses related to listed property may not be deducted for income tax purposes under Code Sec. 274(d) unless the employee substantiates by adequate records, or by sufficient evidence corroborating the employee's own statement: (1) the amount of the expenses; (2) the time and place of the expenses; (3) the business purpose of the expenses; and (4) the business relationship to the employee of the persons involved in the expenses. In addition, employees must document their personal use of the property, and the employer must include such use in the employee's income on Form W-2.

Relief on the horizon. Anita Bartels, Senior Policy Analyst, IRS Small Business/Self-Employed (SBSE) Employment Tax Operations, noted at the American Payroll Association's (APA's) 27th Annual Congress how time consuming the current rules are. For example, all of the personal items on a cell phone bill need to be highlighted. This can be a massive project if an employer has 500 employees with cell phones.

Bartels was asked if IRS would accept a signed agreement between an employer and employee which said that a certain dollar amount of the monthly bill was for personal expenses. Bartels said the agreement would help but IRS would probably look at all the phone bills anyway if the employer was audited.

IRS has been waiting for legislation to be enacted that would ease the recordkeeping requirements in the antiquated rules, but so far that hasn't happened. Bartels said IRS might soon take matters into its own hands by issuing guidance that would simplify the rules. IRS is looking to accept any reasonable arrangement between the employer and employee. For example, under the proposed revised rules, IRS may consider an arrangement under which a company required employees to pay 35% of their cell phone bills to be acceptable. An arrangement where an employer provides a taxable cell phone allowance to employees would also meet IRS's recordkeeping requirements.

[Margaret CPA in OH]

Thanks, KC, for your usual thoroughness and on point research. I have mostly kept up with these same or similar articles but have limited influence in the church. The likelihood of audit is extremely low for the church but I reiterate that the point is to follow the rules, not to avoid an audit. Well, I tell the same thing to clients, too, every tax season and sometimes in between. As yet, none have been audited for these things but I keep thinking it will happen yet!

[Lion EA]

Our church started paying the rector's land line telephone bill in the rectory, at the rector's request. Do we need to put his personal use amount on his W-2? He felt it's like the other utilities that the church pays for the rectory.

[Margaret CPA in OH]

This is tied to the Housing Allowance Exclusion, I believe. Hammar's Church and Clergy Tax Guide addresses this although stating that neither the IRS not a federal court has specifically addressed this issue. He states that "a case can be made that the local telephone expenses are properly includable in the housing allowance calculation. Here's why. Section 107 of the tax code permits a minister to exclude a housing allowance to the extent used by him/her to rent or provide a home. No requirement is made that the expenses be business related. All that is required is that the expenses be incurred to rent or provide a home. Ministers are permitted to exclude the full amount of their mortgage payments, insurance, taxes, electricity, natural gas, and water (assuming these expenses do not exceed the housing allowance)-despite the fact that the vast majority of such expenses are incurred for purely personal reasons having nothing to do with the conduct of the minister's profession." And so on...

My question is, what is the housing allowance for your minister? I have two now-retired minister clients. They pay all the bills, submit the calculations to substantiate whether the total exceeds the designated housing allowance or the fair market rental value and the tax chips fall where they may.

Since you mention a rectory, similar provisions apply. The parsonage/rectory value is not included as income and the church designates a parsonage allowance, in advance, as a portion of the minister;s compensation to the extent used to pay parsonage-related expenses such as utilities, repairs, and furnishings.

Hammar is of the opinion that the first landline is "indispensable to a minister's home" to use for local calls and should be includable in the housing allowance calculation. He goes on to state, "(h)owever, this same reasoning ordinarily would not apply to long-distance telephone calls or cellular phones."

I think you get the gist. There is more but it's late. Hope this helps.

[Lion EA]

The church pays all the rectory utilities and repairs, now to include the land line telephone bills. The rector does not pay any. His housing allowance is pretty small. I don't prepare his taxes, but the "amount actually spent" is probably his limiting factor and not the voted housing allowance. Fair rental value would be large, but his actual expenses are probably light bulbs and little else. (With a prior rector, back when I was the treasurer, the housing allowance was about $3,000. I didn't prepare his taxes either, but could never see him actually spending that much since the church paid for almost everything. But, it wasn't my problem to police the rector's tax return. Now, I'm only the assistant treasurer who pays the bills and don't see the negotiations that go into budgeting.) He's not going to pay his telephone bill out of his housing allowance since the church now pays his telephone bill. Just wondering if there's any problem with us paying his telephone bills like we pay the electric or oil or garbage bills -- or, if we have to include personal use of his home telephone on his W-2. He has five grown children, 13 grandchildren, a side business manufacturing Bethlehem stars, and the rectory sits on the church property that includes his formal office space in the parish hall. Don't know how many church-related calls get made from his home.