The Internal Revenue Service has released guidance aimed at clarifying the tax treatment of mobile phones provided by employers to their employees. The guidance explains a provision of last fall’s Small Business Jobs Act of 2010 that removed cell phones from the definition of listed property, a category under tax law that normally requires taxpayers to perform additional recordkeeping.
IRS Notice 2011-72, issued in mid-September, provides guidance on the treatment of employer-provided cell phones as an excludible fringe benefit. According to the new guidance from the IRS, 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.
Employers had long complained that the categorization of mobile phones as listed property required businesses and their employees to keep detailed records listing exactly which phone calls were business-related and which ones were personal. Many employees needed to carry multiple cell phones just to avoid having their personal calls going to their business phone, and risk a heavy recordkeeping burden.
Simultaneously with the notice issued in September, the IRS also announced in a memo 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. 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, the IRS noted.
Under the guidance, in cases where employers provide cell phones to their employees or where employers reimburse their employees for the business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell phone use that is not primarily business-related, as such arrangements are generally taxable. Details are in the memo and in Notice 2011-72, posted on IRS.gov.