Cell Phones Provided for Business Purposes Treated as a Non-Taxable Working Condition Fringe Benefit

10/12/2011 / Paul J. Linstroth

On September 14, 2011, the Internal Revenue Service (“IRS”), in Notice 2011-72, provided guidance to businesses regarding the tax treatment of cell phones and “other similar telecommunications equipment,” such as smart phones. The IRS stated that employee use of a cell phone and its related calling plans provided primarily for “noncompensatory business purposes” are not includable in an employee’s income since:  (1) the business use will be treated as a working condition fringe benefit; and (2) any personal use will be characterized as a de minimis fringe benefit. In addition, neither business use or personal use is subjected to any recordkeeping requirements when the cell phone is used primarily for business purposes. The IRS guidance is effective for taxable years beginning after December 31, 2009.
In the Notice, the IRS provides the following examples of what qualifies as a noncompensatory business purpose: 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 outside the employee’s normal work day.  According to the IRS, cell phones provided to promote morale or goodwill of an employee, to attract prospective employees, or as a means of furnishing additional compensation to an employee will not be considered as provided for noncompensatory business purposes.
The Notice lacks guidance in the area of cash reimbursements for cell phones. In a field memorandum to its examiners, the IRS stated that the Notice’s relief is extended to cash reimbursements. According to the memorandum, in order for cell phone reimbursements for business use of a personal cell phone to be excludable from an employee’s income, the employer must have substantial noncompensatory business reasons for requiring the employee to use his or her personal cell phone for work-related purposes, the employee must maintain the type of cell phone coverage that is “reasonably related to the needs of the employer’s business,” and the reimbursement must not exceed the expenses actually incurred.
Employers should review their current cell phone policies to determine whether the policy qualifies for the relief in the Notice, and if it does not, consider amending its policy to qualify for the relief.
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While the information provided in this publication is believed to be accurate, it is general in nature and should not be construed as legal advice. You should consult an attorney for advice regarding your individual situation.