The Internal Revenue Service (IRS) has issued guidance designed to clarify the tax treatment of employer-provided cell phones. Under the new guidance, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business-related, as such arrangements are generally taxable.
The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last fall, that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.
Treatment of Employer-Provided Cell Phones as Excludible Fringe Benefit
Notice 2011-72 provides guidance on the treatment of employer-provided cell phones as an excludible fringe benefit. The guidance provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee.
- An employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone.
- For example, the employer's need to contact the employee at all times for work-related emergencies, the employer's requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee's need to speak with clients located in other time zones at times outside of the employee's normal work day are possible substantial noncompensatory business reasons.
- A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.
The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.
Similar Tax Treatment Applies for Certain Cash Allowances and Reimbursements for Work-Related Use of Personally-Owned Cell Phones
Simultaneously with Notice 2011-72, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones.
- Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees' expenses for reasonable cell phone coverage as nontaxable.
- This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages.
For More Information
You may read the guidance contained in Notice 2011-72 in its entirety by clicking here. For more on the tax treatment of various types of employer-provided fringe benefits, please visit the HR360 section on Fringe Benefits.