Employee Benefits-IRS Provides Guidance On Tax Treatment Of Employer Provided Cell Phones

In Notice 2011-72 (the “Notice”), the Internal Revenue Service (the “IRS”) has provided guidance on the tax treatment of cellular telephones or other similar telecommunications equipment (“cell phones”) that employers provide to their employees. Here is what the Notice said.

The value of the business use of an employer-provided cell phone, which was provided to the employee primarily for a noncompensatory business purpose, is excludable from the employee’s income as a working condition fringe under section 132(a)(3) of the Internal Revenue Code (the “Code”), to the extent that, if the employee paid for the use of the cell phone himself or herself, such payment would be allowable as a deduction for the employee under section 162 of the Code.

The cell phone is considered to be provided primarily for a noncompensatory business purpose if there is a substantial reason relating to the employer’s business, other than providing compensation to the employee, for giving the cell phone to the employee. An appropriate purpose might be: (1) the employer’s need to contact the employee at all times for work-related emergencies; (2) the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office; or (3) the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day. On the other hand, none of the following is an appropriate purpose: (a) to promote the morale or good will of an employee; (b) to attract a prospective employee; or (c) as a means of furnishing additional compensation to an employee.

When the value of the business use of the cell phone is excludable from income as a working condition fringe, the substantiation requirement under section 132(d) is automatically satisfied. In addition, the IRS will treat the value of any personal use of a cell phone, provided by the employer primarily for a noncompensatory business purpose, as excludable from the employee’s income as a
de minimis fringe benefit under section 132 (a)(4) of the Code. The Notice applies to any use of an employer-provided cell phone occurring after December 31, 2009, in any tax year ending after that date.