Tax Deduction or Tax Free Reimbursement for Cell Phones

IRS Provides Small Business Record-Keeping Relief 

The Internal Revenue Service just issued (September 14, 2011) Notice 2011-72 offering guidance as to when an employer-provided cell phone can be treated as an excludible fringe benefit and when it can qualify for relaxed record keeping.  The pronouncement also allows employers to reimburse employees for such cell phone costs.  Here are the details:

Background

The Small Business Jobs Act of 2010, enacted last fall, removed cell phones from the definition of listed property, a category under tax law that normally requires additional and detailed record-keeping by taxpayers. The Act removed cell phones from the definition of listed property for taxable years beginning after December 31, 2009. Because the Act removed cell phones from the definition of listed property, the heightened substantiation requirements that apply to listed property no longer apply to cell phones for taxable years beginning after December 31, 2009.

Tax Break Rules

The IRS notice provides that 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. In addition, the IRS will treat the value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes as excludible from the employee’s income as a de minimis fringe benefit.

The key issue here is what the IRS considers noncompensatory business reasons.  According to the IRS, an employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. Here are some examples of substantial noncompensatory business reasons:

• The employer’s need to contact the employee at all times for work-related emergencies, or
• The employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, or
• The employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day.

A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.  Such provision of a cell phone in this context would not come within the IRS provisions under this notice and would be a taxable fringe benefit.

Recordkeeping Relaxed

When an employer provides an employee with a cell phone primarily for noncompensatory business reasons the IRS will not require record-keeping of business use in order to receive this tax-free treatment.

IRS Examiners Given Taxpayer Friendly Audit Instructions

The IRS instructed 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.

Unusual and Excessive Expenses Not Covered

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.

Bottom Line

Where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones in accordance with these new IRS guidelines, tax-free treatment is available without burdensome record-keeping requirements.

Caveat 

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.

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