Overview
On September 14, 2011, the IRS issued guidelines designed to clarify the tax treatment of employer-provided cell phones (Notice 2011-72 and IR 2011-93.) The guidance relates to a provision in the Small Business Job Act (H.R.5297 (“SBJA”) 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. Under the 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 Notice provides guidance on the treatment of employer-provided cell phones as an excludible fringe benefit.
Background
On September 27, 2010, President Obama signed the SBJA which provides that cell phones and similar devices are no longer “listed” property under Tax Code Section 280F, retroactively effective January 1, 2010, which essentially ended the maintenance of usage logs. Unfortunately, when SBJA was enacted, Congress did not provide clarification as to the tax consequences of personal use of cell phones or an employer’s reimbursement of an employee-provided cell phone for business use.
Alas, on September 14, 2011, the IRS issued Notice 2011-72 which states 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. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment. And, in most instances, an employer’s reimbursement to employees for providing a cell phone for bona fide business use will not be taxable. This guidance applies for all tax years beginning January 1, 2010.
The Notice further explains that an employer is treated as having 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 phone. Examples include contacting the employee at all times for work-related emergencies, or the employee’s availability to speak with clients when he is away from the office to call clients in other time zones after his normal workday is over. However, a cell phone provided to promote employee morale or goodwill, to attract prospective employees, or to provide additional compensation to employees is not provided primarily for noncompensatory purposes.
Employer Reimbursement Of Employee-Provided Phone
Simultaneously with the Notice, the IRS announced in a memo (“Interim Guidance on Reimbursement of Employee Personal Cell Phone Usage in light of Notice 2011-72”) 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.
IR 2011-93, provides even more clarification. It says that employers that require employees, primarily for noncompensatory business reasons, to use personal cell phone for business calls may treat reimbursements of employee expenses for reasonable cell phone coverage as nontaxable. It cautions, however, that 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.
What This Means To You
In summary, as we expected when the Act was initially passed, the IRS has clarified that an employee’s personal use of an employer-provided cell phone is a tax-free de minimis fringe benefit and no more recordkeeping is required.
Questions
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Linda M. Monje | 661.864.3800