- IRS Clarifies Tax Treatment of Employer-Provided Cell Phones
- September 21, 2011 | Authors: Michael Jacobster; Melissa K. Ostrower; Bruce H. Schwartz
- Law Firms: Jackson Lewis LLP - New York Office ; Jackson Lewis LLP - White Plains Office
The Internal Revenue Service has clarified that when an employer provides an employee with a cell phone for “noncompensatory” business reasons, the provision of the phone will not be taxable income to the employee, even to the extent the employee uses the phone for personal reasons. Moreover, IRS Notice 2011-72 indicates that the employee will not need to substantiate that all or a portion of the cell phone use is for business purposes. Notice 2011-72 is effective for taxable years after December 31, 2009.
In an audit memorandum issued contemporaneously with IRS Notice 2011-72, the Internal Revenue Service stated that certain reimbursements received for the business use of an employee’s personal cell phone also will not be taxable to the employee to the extent the employer requires the employee to maintain and use the employee’s personal cell phone for business purposes.
In order for the provision of a cell phone (or reimbursement of cell phone expenses) to be considered for reasons related to the employer’s trade or business, there must be substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the cell phone. Examples of such “noncompensatory” business reasons include:
i. the employer’s need to contact the employee at all times for work-related emergencies,
ii. the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and
iii. the employee’s need to speak with clients in other time zones at times outside of employee’s normal work day.
A cell phone provided to promote morale or to provide additional compensation will not meet these requirements and will be subject to normal rules regarding taxation of fringe benefits.
Take Away: An employer may treat the provision of cell phones (or reimbursement of cell phone expenses) to employees as a non-taxable benefit to employees to the extent the cell phones are provided (or reimbursed) for reasons related to the employer’s trade or business without any substantiation requirements. Employers should review their cell phone policies to ensure that they are consistent with IRS requirements.