IRS Issues Guidance on Tax Treatment of Cell Phones

On September 14, 2011, the Internal Revenue Service issued guidance designed to clarify the tax treatment of employer-provided cell phones.

The guidance relates to Section 2043 of the Small Business Jobs Act of 2010, Pub.L.No. 111-240 (enacted last fall) that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

Generally, a fringe benefit provided by an employer to an employee is presumed to be income to the employee unless it is specifically excluded from gross income by another section of the Code. (See Income Tax Regulations § 1.61-21(a)).

Pursuant to Notice 2011-72, the employer- provided cell phones are treated as an excludible fringe benefit. The Notice further 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. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

Simultaneously with the Notice, the IRS 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.

Under the guidance issued today, where employers provide cell phones to their employees or where employers reimburse employees for 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.

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