Liberalized tax credit rules and other business tax breaks in the Small Business Jobs Act of 2010

Transcription

1 Liberalized tax credit rules and other business tax breaks in the Small Business Jobs Act of Year Carryback of Eligible Small Business Credits Under pre-act law, unused general business credits (GBCs) of a business may generally be carried back to offset taxes paid in the previous year, and the remaining amount may be carried forward for 20 years to offset future tax liabilities. Specifically, under pre-act law the unused credit is a carryback to the tax year preceding the unused credit year and a carryforward to each of the 20 tax years following the unused credit year. Additionally, the unused credit is carried to the earliest of the 21 tax years to which the credit can be carried, and the unused credit is carried to each of the other 20 tax years to the extent that the unused credit can't be taken into account for an earlier year because of rules that, in substance, apply the tax liability limit to carrybacks and carryforwards. However, no component credit may be carried back to any tax year before the first tax year for which the credit is allowable (i.e., any tax year before the tax year that the legislation which provides the component credit first allows the credit). Under the tax liability limit, the GBC is limited to the excess, if any, of the taxpayer's net income tax (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the GBC) over the greater of (1) the taxpayer's tentative minimum tax or (2) 25% of the portion of the taxpayer's net regular tax liability (generally, the regular income tax reduced by most non-refundable credits other than the GBC) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule). New law. Eligible small business credits that are determined in the first tax year of the taxpayer beginning in 2010 but are unused (i.e., aren't allowed due to the tax liability limit described above): (1) are carried back to each of the five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year), (2) are carried, in their entire amount, to the earliest of the 25 tax years (instead of 21 tax years) to which the credits can be carried, and (3) are carried to each of the other 24 tax years (instead of 20 tax years) to the extent that the eligible small business credits can't be taken into account for an earlier year because of the Code Sec. 39(b) and Code Sec. 39(c) rules that in substance, apply the tax liability limit to carrybacks and carryforwards. ( Code Sec. 39(a)(4), as amended by Act Sec. 2012(b)) Eligible small business credits (ESB credits), for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ( Code Sec. 39(a)(4)(B) ESBs are businesses that (1) are either corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million. RIA illustration : T, an eligible small business, has a tax year that ends on June 30. For its tax year beginning July 1, 2010 (the 2011 tax year), it has an ESB credit of $100,000. However, because of the tax liability limit, T isn't allowed any of the $100,000 of unused eligible small business credit in the 2011 tax year. T carries the entire $100,000 of

2 unused eligible small business credit back to the tax year ending June 30, 2006 (the 2006 tax year), which is the both the earliest year in the fiveyear carryback period and the earliest tax year in which the tax liability limit doesn't bar the allowance of the $100,000 credit. Special rules are provided for the marginal well production credit. ( Code Sec. 39(a)(3)(A) ) Eligible Small Businesses May Offset AMT With General Business Credits in 2010 Tax Years Under Code Sec. 38(c)(1) (the tax liability limitation), the general business credit (GBC) is limited to the excess, if any, of the taxpayer's net income tax (generally, the taxpayer's regular income tax and alternative minimum tax (AMT)), reduced by most non-refundable credits other than the GBC) over the greater of: (1) the taxpayer's tentative minimum tax for the tax year, or (2) 25% of the portion of the taxpayer's net regular tax liability (generally, the regular income tax reduced by most non-refundable credits other than the general business credit) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule). RIA observation: The tentative minimum tax is the lternative minimum taxable income (in excess of an exemption amount) multiplied by a percentage, and actual AMT is the excess of the tentative minimum tax over the regular tax (after the regular tax is reduced by the foreign tax credit and certain other amounts). Thus, a taxpayer has an AMT liability only in those tax years in which the tentative minimum tax exceeds the regular tax (reduced as described above). Accordingly, in a tax year in which a taxpayer has an AMT liability, the GBC generally isn't allowed against either the AMT or the regular tax (if any). And, in a tax year in which the taxpayer doesn't have an AMT liability, but the tentative minimum tax is in excess of the amount computed under the 25%-inexcess-of-$25,000 rule (above), the excess may limit the extent to which the GBC allowed against the regular tax (if any). Under pre-act law, the empowerment zone employment credit (including renewal community employment credits for tax years beginning before 2010) could offset 25% of AMT, the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) could offset 100% of AMT, and certain enumerated specified credits could offset 100% of AMT under Code Sec. 38(c)(4). New law. For eligible small business (ESB) credits (defined below) determined in tax years beginning in 2010, the Act allows ESB credits to offset AMT liability and increases the extent to which ESB credits can offset regular tax liability. ( Code Sec. 38(c), as amended by Act Sec. 2013(a)) The change applies for credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of such credits. (Act Sec. 2012(d)) Specifically, in applying Code Sec. 38(c)(1) (the limitation based on a taxpayer's tax liability) to ESB credits in tax years beginning in 2010: (1) the tentative minimum tax is treated as being zero, and

3 (2) the limitation based on a taxpayer's tax liability under Code Sec. 38(c)(1) (as modified by item (1), above) is reduced by the credit allowed under Code Sec. 38(a) for the tax year (i.e., the sum of the current year, carryforward, and carryback business credit amounts), other than ESB credits. ( Code Sec. 38(c)(5) ) Since the Act provides that the tentative minimum tax is treated as being zero for ESB credits (see item (1) above), an ESB credit can offset both regular and AMT liability. ESBs defined. ESBs are businesses that (1) are corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million. ( Code Sec. 38(c)(5)(C) ) RIA observation: For purposes of the gross receipts test, the threetax-year testing period for a calendar year taxpayer is 2007, 2008, and For a fiscal year taxpayer, the three-tax-year testing period includes tax years beginning in 2007, 2008, and For purposes of applying the $50 million gross receipts test, rules similar to the rules of Code Sec. 448(c)(2) and Code Sec. 448(c)(3) (relating to the $5 million gross receipts exception to the prohibition on the use of the cash method of accounting by certain entities) apply. ( Code Sec. 38(c)(5)(C) ) ESB credits defined. The term ESB credits means the sum of the credits listed in Code Sec. 38(b) (the list of the component credits of the current year business credit) that are determined for the tax year with respect to an ESB. ( Code Sec. 38(c)(5)(B) ) Partners and S shareholders. Credits determined with respect to a partnership or S corporation are not treated as ESB credits by any partner or shareholder unless the partner or shareholder meets the gross receipts test under Code Sec. 38(c)(5)(C) for the tax year in which the credits are treated as current year business credits. Code Sec. 38(c)(5)(D) ) Other rules. The ESB credits can't be taken into account under:... the rules permitting the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) to offset 25% of AMT,... the rules permitting the New York Liberty Zone employment credit (for certain wages paid or incurred before 2004) to offset AMT, or... the rules permitting specified credits to offset AMT. ( Code Sec. 38(c)(5)(B) ) 100% Gain Exclusion for Qualified Small Business Stock For Regular Tax and AMT Under pre-act law, noncorporate taxpayers could generally exclude 75% of the gain realized on the sale or exchange of qualified small business stock (QSBS) acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. For QSBS acquired before Feb. 18, 2009 or after 2010, a taxpayer other than a corporation could exclude 50% of the gain on the disposition of QSBS held over five years. For QSBS in a corporation that also was a qualified business entity (QBE) i.e., met the QBE requirements under the empowerment zone rules (except that the DC Enterprise Zone

4 wasn't treated as an empowerment zone) the exclusion rate was 60% (but 75% if that rate would otherwise apply); no gain attributable to periods after Dec. 31, 2014 was eligible for the 60% rate. RIA observation: If 50% of the gain on the disposition of qualifying small business stock is excluded from gross income, the maximum effective rate on the gain from the sale of the QSBS is 14% (28% rate 50%). If 60% of the gain on the disposition is excluded, the maximum effective rate is 16.8% (28% 60%). If 75% of the gain on the disposition is excluded, the maximum effective rate is 7% (28% 75%). For alternative minimum tax (AMT) purposes, under pre-act law, a percentage of the excluded gain was a preference item, and, thus, included in income, regardless of when the stock was acquired. For dispositions made in tax years beginning before Jan. 1, 2011, the percentage of the otherwise-excluded gain that was a preference item (the preference percentage) was in all cases 7% (7% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began after Dec. 31, 2000 (except for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 28% (28% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began before Jan. 1, 2001 (and for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 42% (42% preference stock). RIA observation: For AMT purposes, the portion of the total gain that is includible in taxable income is taxed at a maximum rate of 28%. Thus, for AMT purposes: (1) gain from 7% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 14.98%; (2) gain from 28% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 17.92%; (3) gain from 42% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 19.88%, and (4) gain from 28% preference stock subject to the 75% exclusion is taxed at a maximum effective rate of 12.88%. Generally, for gain to be excludible, the taxpayer must acquire the stock at original issue after Aug. 10, '93. The gain excludible by a taxpayer for the QSBS of any one corporation is the greater of: (1) ten times the taxpayer's basis (excluding post-issuance basis increases) in that corporation's QSBS disposed of by the taxpayer in the tax year, or (2) $10 million ($5 million if married filing separately), and the $10 million (or $5 million) amount is reduced by the total amount of eligible gain taken into account by the taxpayer on dispositions of that corporation's QSBS in earlier tax years (referred to below as the basis-or-dollar-amount limit rule). QSBS must be issued by a corporation that meets a gross assets limit and certain other requirements. New law. For QSBS acquired after the enactment date and before Jan. 1, 2011, the Act provides that: (1) the 50% gain exclusion for QSBS for regular tax purposes is increased to 100%; (2) the 60% gain exclusion for QSBS issued by a QBE doesn't apply; (3) and the treatment of a percentage of the excluded gain for QSBS as an AMT preference item doesn't apply. ( Code Sec. 1202(a)(4), as amended by Act Sec. 2011(a))

5 RIA observation: Thus, for QSBS acquired after the enactment date and before Jan. 1, 2011, no regular tax or AMT is imposed on the sale of QSBS held for more than five years. RIA illustration : On Oct. 1, 2010, Tom acquires at original issuance 100 shares of QSBS at a total cost of $100,000. The stock isn't acquired under an option, or other right or obligation, acquired before Jan. 1, Tom sells all of the shares on Oct. 2, 2015 for $1.1 million. Tom can exclude from income all of the $1 million of gain for regular tax and AMT purposes. If pre-act law had instead applied in the above situation, the maximum effective tax rates on the $1 million of gain would have been a regular tax rate of 7% (under the 75% exclusion) and an AMT rate of 12.88% (because the stock is 28% preference stock, i.e., stock disposed of after Dec. 31, 2010 that wasn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001). The Act also changes the last day on which QSBS can be acquired to be eligible for the 75% gain exclusion from Dec. 31, 2010 to the enactment date. ( Code Sec. 1202(a)(3) ) RIA observation: The date change assures that for QSBS acquired after the enactment date and before Jan. 1, 2011, the 100% exclusion (item (1), above) applies, and not the 75% exclusion that would have otherwise applied under pre-act law. RIA observation: Unless Congress extends beyond Dec. 31, 2010, the deadline for acquiring QSBS eligible for the 100% gain exclusion, the 50% and 60% gain exclusion rules will again be in effect, and the percentage of otherwise-excluded gain treated as an AMT preference item will be, in most cases, 28%. Temporary Reduction in S Corporation Built-in Gain Period An S corporation is generally not subject to tax, but instead passes through its income to its shareholders, who pay tax on their pro-rata shares of the S corporation's income. Where a corporation that was formed as a C corporation elected to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period. Under pre-act law, the recognition period was the first ten S corporation years (or during the ten-period after the transfer). In an exception to this rule, the American Recovery and Reinvestment Act of 2009 (ARRA, P.L , Sec. 1251(a) ) provided that, for S corporation tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. Thus, for the 2009 and 2010 tax years, the recognition period is reduced to seven years. This rule applies separately for property acquired from C corporations in carryover basis transactions. New law. For tax years beginning after Dec. 31, 2010, the Act provides that for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized builtin gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year. ( Code Sec. 1374(d)(7)(B)(ii), as amended by Act Sec. 2014(a))

6 RIA observation: Thus, a seven tax year period applies for the 2009 and 2010 tax years, while a five year period will apply for the 2011 tax year. S corporations that are considering selling assets that may be subject to the built-in gains tax might consider delaying the sale of the assets until the 2011 tax year in order to avoid the tax. Major Rewrite for Penalty for Failure to Report Shelter Transactions Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a reportable transaction which is required to be included with the return or statement. Reportable transactions are those identified by IRS as having a potential for tax avoidance or evasion. A listed transaction for Code Sec. 6707A purposes is a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec purposes. The penalty applies regardless of whether the transaction results in a tax understatement. The penalty also applies in addition to any other penalty that may be imposed under the Code. Under pre-act law, the penalty for failure to report reportable transactions was $10,000 in the case of a natural person and $50,000 for others ($100,000 and $200,000 respectively for listed transactions). The Code Sec. 6707A penalty was widely criticized as a Draconian provision that unfairly penalizes small business and other taxpayers that unwittingly participate in a transaction that turns out to be a tax shelter. IRS announced, on July 6, 2009, a suspension of Code Sec. 6707A collection enforcement through Sept. 30, 2009, in cases where the annual tax benefit from the transaction was less than $100,000 for individuals or $200,000 for other taxpayers per year. This suspension was extended several times over. The last extension expired on June 30. New law. For penalties assessed after Dec. 31, 2006, the Act completely replaces the Code Sec. 6707A penalty structure. Except as provided below, the amount of the penalty with respect to any reportable transaction is 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction if it were respected for federal tax purposes). ( Code Sec. 6707A(b)(1), as amended by Act Sec. 2041(a)) The amount of the penalty for any reportable transaction for any tax year can't exceed: (1) for a listed transaction, $200,000 ($100,000 in the case of a natural person); and (2) for any other reportable transaction, $50,000 ($10,000 in the case of a natural person). ( Code Sec. 6707A(b)(2) ) RIA observation: The Act dramatically lowers the Code Sec. 6707A penalties. The previously applicable penalty amounts required to be imposed for listed transactions ($100,000 for natural persons and $200,000 for others) are now the maximum penalties for such persons for listed transactions. Similarly, the previously applicable penalty amounts required to be imposed for reportable transactions ($10,000 for natural

7 persons and $50,000 for others) are now the maximum penalties for such persons for reportable transactions. The Act also establishes a minimum penalty for a failure to disclose a reportable or listed transaction. The amount of the penalty for any transaction for any tax year can't be less than $5,000 for a natural person and $10,000 for any other person. ( Code Sec. 6707A(b)(3) ) RIA recommendation: Since the Act's changes are retroactive (i.e., they are effective for penalties assessed after Dec. 31, 2006), taxpayers who have already paid a Code Sec. 6707A penalty should consider filing a refund claim. Report to Congress. The Act also provides that IRS must submit to the Congress an annual report on the penalties assessed by IRS during the preceding year under: Code Sec. 6662A (accuracy-related penalty on understatements due to reportable transactions), Code Sec. 6700(a) (promoting abusive tax shelters), Code Sec (failure to furnish information on reportable transactions), Code Sec. 6707A (failure to include reportable transaction information with a return), and Code Sec (failure to maintain lists of advisees for reportable transactions). (Act Sec. 2103) The first report is to be submitted not later than Dec. 31, Health Insurance Costs for Self and Family Are Deductible in Computing 2010 Self-Employment Tax A self-employed individual can deduct as a trade or business expense the amount paid during the tax year for health insurance for the taxpayer; the taxpayer's spouse; the taxpayer's dependents; and, effective Mar. 30, 2010, any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. Under pre-act law, a self-employed individual's health insurance costs, although deductible for income tax purposes, weren't deductible in determining net earnings from self-employment. Net earnings from selfemployment are generally an individual's trade or business income, less the deductions permitted by the Code that are attributable to that trade or business, plus the individual's distributive share of partnership income or loss. The health insurance deduction isn't available for any month for which the taxpayer is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer or of the taxpayer's spouse, dependent, or under-age-27 child. The deduction is limited to the earned income (within the meaning of Code Sec. 401(c), i.e., net earnings from self-employment) from the trade or business for which the health insurance plan was established. With certain exceptions, each U.S. citizen or resident alien who has self-employment income for the tax year must pay a self-employment (SE) tax consisting of: (1) a 12.4% old-age, survivors, and disability insurance (OASDI) tax, commonly referred to as social security tax ; and (2) a 2.9% hospital insurance (HI) tax, commonly referred to as Medicare tax. Both taxes are applied to net earnings from self-employment above a floor amount. There is also an annually-adjusted ceiling limitation on the OASDI tax ($106,800 in 2010), but no ceiling on the HI tax. New law. For a taxpayer's first tax year beginning after Dec. 31, 2009, the income tax deduction allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who haven't attained age 27 as of

8 the end of the tax year is also allowed in calculating net earnings from self-employment for purposes of the self-employment tax. (Committee Report) Specifically, the Act provides that the rule disallowing a deduction of a self-employed individual's health insurance costs in determining net earnings from self-employment applies only for tax years beginning before Jan. 1, 2010, or after Dec. 31, ( Code Sec. 162(l)(4), as amended by Act Sec. 2042(a)), effective for tax years beginning after Dec. 31, RIA observation: By reducing the after-tax cost of health insurance coverage, the provision makes it easier for the self-employed to afford coverage or to increase their existing coverage. RIA illustration : For 2010, Bob, a self-employed individual, paid $13,770 for health insurance coverage for himself, his spouse, and two children ages 11 and 13. As a result of the above provision, Bob can deduct the $13,770 in computing his net earnings from self-employment. The 15.3% self employment tax rate applied to the $13,770 of premiums is $2,107. However, Bob's actual tax saving may be less. For one thing, if Bob's net earnings from self-employment are at least $120,570 (the $106,800 OASDI ceiling plus the $13,770 deduction), Bob will see no reduction in the 12.4% OASDI tax. Only the 2.9% HI tax, which has no ceiling, will be reduced. In addition, an above-the-line income tax deduction is allowed for one-half of self-employment tax. Therefore, any reduction in self-employment tax as a result of the Act will cause an increase in income tax. It's intended that earned income, within the meaning of Code Sec. 401(c), be computed without regard to the self-employment tax deduction for health insurance costs. However, a technical correction may be needed to achieve this result. (Committee Report) Cell Phones Removed From Listed Property Category There's no deduction for listed property unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement: the amount of the expense or other item; the use of the property, the business purpose of the expense or other item; and the business relationship to the taxpayer of persons using the property. IRS may by regs provide that some or all of these requirements won't apply in the case of an expense that does not exceed an amount prescribed by regs. Under pre- Act law, any cell telephone (or other similar telecommunications equipment) is treated as listed property. The substantiation requirements for listed property require the following elements to be proved: the amount of each separate expenditure with respect to an item of listed property (e.g., cost of buying it); the amount of each business use based on the appropriate measure (that is, time) and the amount of total use of the listed property for the taxable period; the date of the expenditure or use; and the business purpose for an expenditure or use. An employee generally must include in gross income the amount by which the fair market value of a fringe benefit exceeds the sum of (a) the amount, if any, paid for the benefit by or on behalf of the employee, and (b) the amount, if any, specifically excluded from

9 gross income by some other section of the Code. Thus, an employer must treat an employee's personal use of an employer-provided cell phone as a taxable fringe benefit. Gross income does not include a working condition fringe benefit (WCFB), which is defined as any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec If, under Code Sec. 274 or other Code section, certain substantiation requirements must be met in order for a deduction under Code Sec. 162 or Code Sec. 167 to be allowable, then those substantiation requirements apply in determining whether a property or service is excludable as a WCFB. The Code Sec. 274 substantiation requirements are satisfied by adequate records or sufficient evidence corroborating the employee's own statement. As a result, such records or evidence provided by the employee, and relied upon by the employer to the extent permitted by the Code Sec. 274(d) regs, are enough to substantiate a WCFB. Listed property that isn't used more than 50% for business purposes must be depreciated via straight line under the alternative depreciation system rules. Individual businesses as well as business groups have long complained that treating cell phones as listed property is archaic and unreasonably burdensome. They argued that while cell phones were once very expensive they are now low-cost commodities often operated under monthly plans that offer free night and weekend calls, and may even offer unlimited calls for a fixed price. Notice , IRB 1068, requested comments on several IRS proposals to simplify the procedures under which employers substantiate an employee's business use of employer-provided cellular telephones or other similar telecommunications equipment. Shortly thereafter, IRS Commissioner Doug Shulman and Treasury Secretary Timothy Geithner urged Congress to make clear that there will be no tax consequence to employers or employees for personal use of workrelated devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete. New law. For tax years beginning after Dec. 31, 2009, the Act removes cellular telephones (cell phones) and other similar telecommunications equipment from the categories of listed property under Code Sec. 280F. ( Code Sec. 280F(d)(4)(A), as amended by Act Sec. 2043(a)) Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property don't apply to cell phones. RIA observation: According to a Senate Finance Committee Summary dated July 21, 2010, the Act delists cell phones so their cost can be deducted or depreciated like other business property costs, without onerous recordkeeping requirements. This means employers may deduct the cost of providing cell phones to their employees for employmentrelated business use, without having to satisfy the strict substantiation requirements for listed property. To support a deduction for the cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the deduction for other types of business equipment. According to the Committee Report, the Act doesn't affect IRS's authority to determine the appropriate characterization of cell phones as a WCFB under Code Sec. 132(d).

10 RIA observation: Although the Act makes it easier for employees to claim the WCFB exclusion for employer-provided cell phones, it doesn't address the employee's personal use of the phone. It doesn't appear that a cell phone used for some personal use as well as for employment-related business use would pass muster as a WCFB. That's because a WCFB is any property or service provided to an employee of the employer to the extent that, if the employee paid for the property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec However, under Code Sec. 262(a), no deduction is allowed for personal, living, or family expenses, unless otherwise provided. Thus, absent a specific exclusion for personal cell phone use (e.g., as a de minimis fringe benefit, see below), an employee's exclusion for an employer-provided cell phone is limited to an amount based on his employment-related business use of the phone. According to the Committee Report, the Act doesn't affect IRS's authority to determine that the personal use of cell phones that are provided primarily for business purposes may qualify as a de minimis fringe benefit. RIA observation: Code Sec. 132(a)(4) provides a specific exclusion from gross income for de minimis fringe benefits. A de minimis fringe benefit is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees. IRS may well declare an employee's personal use of an employer-provided cell phone to be a tax-free de minimis fringe benefit. RIA observation: The delisting of cell phones also means that cell phones are no longer subject to the limitations described above for listed property that isn't used more than 50% for business purposes. That is, a taxpayer won't be denied a Code Sec. 179 expensing election for a cell phone (and won't be limited to using straight-line depreciation under the ADS system for a cell phone), solely because the cell phone isn't used more than 50% for business purposes in the year it's placed in service Thomson Reuters/RIA. All rights reserved.