Today, the IRS issued long awaited guidance clarifying the tax treatment of employer-provided cell phones. The guidance relates to a provision in the Small Business Jobs Act of 2010 (the “Act”), 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.
Previously, if an employer provided a cell phone to an employee and/or paid the costs of using the cell phone, the employee received a fringe benefit. To the extent that the employee used the employer’s cell phone for business purposes, the fair market value of such usage qualified as a working condition fringe benefit excludable from the employee’s gross income so long as proper records were kept. However, to the extent the employee used the employer’s cell phone for personal purposes, the fair market value of the personal usage was 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 Act provided some relief from these burdensome substantiation requirements by removing cellular phones (and “similar telecommunications equipment”) from the definition of listed property in Section 280F. However, the Act did not address whether an employee’s limited or de minimis personal use of employer-provided cell phones is nontaxable to the employee.
Notice 20011-72 answers that question by providing clear guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. The Notice states that when an employer provides an employee with a cell phone primarily for 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. The IRS also issued a memo to agents noting that cell phone reimbursements to be reasonably calculated so as not to exceed the employee’s actual expenses in maintaining the cell phone. Further, the memo stated that the reimbursement for business use of a personal cell phone must not be a substitute for a portion of the employee’s regular wages.
From now on no part of the use of an employer provided cell phone will be treated as taxable income to the employee so long as it is provided primarily for business reasons. Instead, the business use of the cell phone will be considered a “working condition fringe benefit” or, a benefit where, if the employee were to pay for such property or services, such payment would be allowable as a deduction. In addition, personal use of the employer-provided phone will be considered a “de minimus fringe benefit” or a benefit in which the value of the property or service is so small as to make accounting for it unreasonable or administratively impracticable. The new rule applies to any use of an employer-provided cell phone occurring after December 31, 2009.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.