IRS Treatment of Employer-Provided Cell Phones and Employer Reimbursement of Personal Cell Phone Use

With the issuance of Notice 2011-72, the Internal Revenue Service finally addressed the uncertainty relating to the tax treatment of employer-provided cell phones (or other similar telecommunications equipment) and of the personal use of an employer-provided cell phone by the employee.

Historically, cell phones provided by an employer to its employees for business use were deductible to the employer and excludable from the employee’s income as a “working condition fringe benefit”, subject to stringent recordkeeping requirements. However, the Small Business Jobs Act of 2010 removed the cell phones from the definition of listed property for tax years beginning after December 31, 2009. As a result, employers could arguably exclude the value of certain employer-provided cell phones from employee wages without complying with the substantiation requirements applicable to other employer provided property.

This new guidance offers good news for employers. Pursuant to Notice 2011-72, an employee’s use of an employer-provided cell phone for reasons related to the employer’s trade or business will be treated as a working condition fringe benefit and excludable from the employee’s income if the cell phone is issued primarily for business reasons. A cell phone is considered to be issued primarily for business purposes if there are substantial reasons relating to the employer’s business for providing the employee with a cell phone (other than to provide compensation to the employee). But perhaps the best news for employers is that any substantiation requirements that would otherwise be needed to take a deduction will be deemed to be satisfied. The Notice also clarified that the value of any personal use by the employee of the employer-provided cell phone will be excludable from the employee’s gross income as a “de minimis fringe benefit”.

Simultaneous with the issuance of Notice 2011-72, the SB/SE Director of Examination issued an IRS Memorandum to all field examiners, dated September 14, 2011, providing interim audit guidance on employer reimbursement to employees for expenses relating to use of their personal cell phones for business purposes. Where employers, for substantial business reasons, require employees to maintain and use their personal cell phones for business purposes, reimbursement by the employer of employees’ cell phone expenses will not result in wages to the employees. However, the employees must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employees actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone cannot be a substitute for a portion of the employee’s regular wages.

Examples of substantial noncompensatory business reasons for requiring employees to maintain personal cell phones and reimbursing them for their use include: (1) the employer’s need to contact the employee at all times for work-related emergencies; and the (2) the employer’s requirement that the employee be available to speak with clients at times when the employee is away form the office or at times outside the employee’s normal work schedule.

Notice 2011-72 is applicable to any use of an employer-provided cell phone occurring after December 31, 2009.