Guidance from IRS on Cell Phone Rules Is Still Pending

Nonprofits may finally get some relief from the burdensome record-keeping requirements associated with employer provided cell phones.

Currently, if an employer provides a cell phone to an employee and pays the costs of using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the employer's cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit excludable from the employee's gross income and the cell phone expense is a deductible business expense for the employer, provided that the substantiation requirements of § 274(d) are met. However, to the extent the employee uses the employer's cell phone for personal purposes, the fair market value of the personal usage is includable in the employee's gross income.

These rules have perplexed non-profit and for-profit employers alike and forced them to come up with absurdly detailed policies to account for employees' personal cell phone use.

The Small Business Jobs Act (the “Act”), signed into law on September 27, provides some relief from these burdensome substantiation requirements. The Act relieves employers from the onerous documentation requirements by removing cellular phones (and “similar telecommunications equipment”) from the definition of listed property in Section 280F.

However, the new law does not address whether an employee's limited or de minimis personal use of employer-provided cell phones is nontaxable to the employee.  Further, the law does not affect the IRS's authority to determine the appropriate characterization of cell phones as a working condition fringe benefit or a de minimis fringe benefit.  Therefore, before employers make any permanent policy changes with regard to their cell phone benefits, it may be prudent to await specific guidance from the IRS.

For the full text of IRS Notice 2009-46, click here.