Virtually unheard of just 30 years ago, cell phone use in the U.S. has exploded since the first 150-user trial in D.C. and Baltimore in 1981. Now, for most of us, it’s unimaginable to function without one.
If your business provides employees with cell phones for business use—or reimburses employees for the business use of their personal cell phones—you’ve been subject to tax rules and recordkeeping requirements mandated by the IRS. If you’re an employee, the value of the cell phone provided or reimbursed by your employer has potentially been taxable.
Now the IRS has issued Notice 2011-72 and many of the rules have changed.
The federal tax laws governing employer-provided cell phones—as well as reimbursement for employee-owned cell phones—changed as a result of the Small Business Jobs Act of 2010. For tax years beginning after 2009, the Act removed cell phones from the category of listed property, which meant they were no longer subject to burdensome recordkeeping requirements in order to substantiate business use.
Unfortunately, the Act left many other questions regarding their tax treatment unanswered.
Last month, the IRS published Notice 2011-72 providing additional guidance for federal income tax purposes, retroactive to the beginning of 2010.
New Guidance from the IRS
As a general rule, the value of a cell phone provided to an employee for noncompensatory business reasons is not considered taxable wages to the employee, but is deductible by the employer.
Business use of the phone is excluded from the employee’s income as a working condition fringe benefit and the documentation requirements that would otherwise apply are considered to have been met.
Any personal use is excluded as a de minimis fringe benefit, as long as certain conditions are met. The phone plan should be appropriate for the business purpose and the reimbursement can’t exceed actual expenses or substitute for a portion of the employee’s regular wages.
Noncompensatory business reasons are defined as substantial reasons that relate to the employer’s business. Examples provided by the IRS include situations where the employee must be reachable at all times for work-related emergencies, or to speak with clients while away from the office, or to speak with clients in other time zones outside of normal work hours.
Noncompensatory business reasons do not include situations where the cell phone is provided (or reimbursed) to enhance morale, increase compensation or attract potential employees. In these cases, employers are subject to detailed recordkeeping requirements and the value of the cell phone is generally considered to be taxable as compensation