- The Taxation Treatment of Employer-Provided Cell Phones
- November 1, 2011
- Law Firm: Nexsen Pruet LLC - Columbia Office
The Internal Revenue Service has issued long-awaited guidance that clarifies the taxation treatment of employer-provided cell phones or other similar telecommunications equipment. This guidance indicates that the value of cell phones that are provided primarily for noncompensatory business reasons generally will be nontaxable to the employee.
The Small Business Jobs Act of 2010, Pub. L. No. 111-240, removed cell phones from the definition of listed property, which is subject to the strict substantiation requirements in order for the business use of such property to be excluded from income. These requirements previously mandated that employers maintain detailed records establishing the amount expended for cell phones, their business usage, their business purpose, and the business relationship between the taxpayer and the persons using the cell phones. When cell phones were removed from the definition of listed property, it raised the question of whether it was necessary to establish their business usage in order for the value of the phones to be nontaxable to employees.
IRS Notice 2011-72 answered that question for us. This Notice provides that, effective for tax years beginning after 2009, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the value related to the employee’s business-related use of the cell phone as an excludible working condition fringe benefit. Additionally, the Notice indicates that the value related to the employee’s personal use of the cell phone will be treated as a de minimis fringe benefit and thus excluded from the employee’s wages.
The IRS will consider an employer 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 and the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office would be noncompensatory business purposes. However, 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 would not be provided primarily for noncompensatory business purposes.