The Internal Revenue Service issued new and favorable guidance today on the tax treatment of cellular telephones or other similar telecommunications equipment (hereinafter collectively “cell phones”) that employers provide to their employees (Notice 2011-72).
The Service has finally recognized that many employers provide their employees with cell phones primarily for noncompensatory business reasons. The value of the business use of an employer-provided cell phone is excludable from an employee’s income as a working condition fringe to the extent that, if the employee paid for the use of the cell phone themselves, such payment would be allowable as a trade or business expense deduction for the employee.
Under this new guidance, 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. Examples of possible substantial noncompensatory business reasons contained in the Notice are: the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and 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, however.
The Notice provides that, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the Service will treat the employee’s use of the cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s income. In addition, solely for purposes of determining whether the cell phone constitutes a working condition fringe benefit, the substantiation requirements that the employee would have to meet in order for claim a deduction are deemed to be satisfied. In addition, the Service will treat the value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes as excludable from the employee’s income as a de minimis fringe benefit.
The rules of this notice apply to any use of an employer-provided cell phone occurring after December 31, 2009. If you have questions concerning the tax treatment of your employer-provided cell phone, contact me at 214.957.3366 or via email at response@phdcpa.com.
Ronnie
Copyright 2011, Ronnie C. McClure, PhD, CPA
