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IRS Explains Tax Treatment of Employer-Provided Cell Phones

Background

The Small Business Jobs Act of 2010 (the Act) removed cell phones from the definition of listed property for taxable years beginning after Dec. 31, 2009.  As a result, the additional substantiation requirements normally applicable to listed property no longer apply to cell phones for taxable years beginning after Dec. 31, 2009. However, this removal did not otherwise alter the requirement that an employer-provided cell phone is a fringe benefit, the value of which must be included in the employee's gross income, unless an exclusion applies or the cell phone may be treated as an excludible fringe benefit. [See IRC section 132.]

Thus, with the removal of cell phones from listed property under section 280F, a related issue that arose was whether the value of employer-provided cell phones constitutes wages or gross income to the employee if there is personal use of the cell phone.

When cell phones were treated as listed property prior to the Act, they were subject to strict substantiation documentation requirements that tracked the business versus personal use of the property.  Due to the fact that many companies were not able to obtain and track the level of documentation required for cell phones treated as listed property, many companies who paid 100 percent of the cell phone costs for employees entered into arrangements with IRS exam teams to include a percentage of the cell phone cost in an employee's Form W-2 as a taxable fringe benefit (generally anywhere from 10 to 20 percent). Once cell phones were "de-listed" from section 280F, it was unclear whether companies could now deduct 100 percent of cell phone costs as an ordinary and necessary business expense under section 162, without including any amount in an employee's wages, based on the position that any personal use by employees was de minimis. [See IRC section 132(e).] The IRS has now answered these questions with the issuance of Notice 2011-72, [Sept. 14, 2011.] providing much needed guidance on the tax treatment of employer-provided cell phones.

Discussion

In Notice 2011-72, the IRS notes that many employers provide their employees with cell phones primarily for noncompensatory business reasons, further providing that 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 himself, such payment would be allowable as a deductible business expense.

Notice 2011-72 states that 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 a cell phone, and provides the following examples of possible substantial noncompensatory business reasons:

• an employer's need to contact an 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
• the employee's need to speak with clients located in other time zones at times outside of the employee's normal work day

Alternatively, Notice 2011-72 states that substantial noncompensatory business reasons do not include cell phones provided:

• to promote employee morale or good will
• to attract prospective employees
• as a means of furnishing additional compensation to employees

In Notice 2011-72, the IRS favorably provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, it will be nontaxable to the employee as a working condition fringe benefit [See IRC section 132(d).] (the value of which is excludable from the employee's income) and recordkeeping of business use will not be required. 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 excludable from the employee's income as a de minimis fringe benefit.

Implications
The long-awaited issuance of Notice 2011-72 is welcome guidance for employers, and with an effective date applicable to any use of an employer-provided cell phone occurring after Dec. 31, 2009, it should resolve any pending issues under exam with respect to personal use of employer-provided cell phones (i.e., agents should not require documentation supporting the level of personal use by employees of cell phones provided for substantial noncompensatory business reasons, and correspondingly should not require employers to treat any such amounts as taxable fringe benefits).

For more information
If you have questions or would like to discuss further, please contact Eustis Corrigan at 601.326.1043 or eustis.corrigan@horne-llp.com.