On September 14, 2011, the IRS issued updated guidance(pdf) on the tax treatment of employer-provided cell phones, effectively treating both business and personal use of such phones as exempt from an employees wages.
The Small Business Jobs Act removed cell phones from the definition of listed property beginning January 1, 2010, meaning they no longer required heightened levels of substantiation to qualify as a business expense. However, Congress had not altered the use of an employer-provided cell phone as a fringe benefit. As a result, the value of employer-provided cell phones was still subject to inclusion in an employees wages unless a specific exclusion applied.
In Notice 2011-72 the IRS observed that [m]any employers provide their employees with cell phones primarily for noncompensatory?business reasons. Accepting what is a common business reality today, the IRS announced that if an employer provides an employee with a cell phone primarily for noncompensatory business purposes, the cell phone will be treated as a working condition fringe benefit and the value of the cell phone usage will be excluded from the employees wages.
The IRS explained that noncompensatory business purposes can include the employers need to contact the employee at all times for work-related emergencies, the employers requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employees need to speak with clients located in other time zones at times outside of the employees normal work day. It added that providing cell phones 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 do not qualify as being primarily for noncompensatory business purposes.
In addition to the business use of a cell phone, the IRS also announced that it will treat the value of any personal use of such a cell phone as a nontaxable?de minimis fringe benefit. Therefore, personal use will also be excluded if the business use of the phone is for noncompensatory business purposes.
These new administrative rules are effective for periods beginning January 1, 2010. They apply to both employer-provided cell phones, as well as reimbursement of employee-owned cell phones.
In light of these changes, employers should consider reviewing their cell phone policies. Many policies prohibited any personal use of employer-provided cell phones. Companies may want to reconsider those policies in light of the IRS new guidance. Employers should also ensure that any employer-provided cell phone or reimbursement is for a noncompensatory?business purpose and is not merely to promote morale, attract employees or to add to an employees compensation.
By: William Weissman
The Small Business Jobs Act removed cell phones from the definition of listed property beginning January 1, 2010, meaning they no longer required heightened levels of substantiation to qualify as a business expense. However, Congress had not altered the use of an employer-provided cell phone as a fringe benefit. As a result, the value of employer-provided cell phones was still subject to inclusion in an employees wages unless a specific exclusion applied.
In Notice 2011-72 the IRS observed that [m]any employers provide their employees with cell phones primarily for noncompensatory?business reasons. Accepting what is a common business reality today, the IRS announced that if an employer provides an employee with a cell phone primarily for noncompensatory business purposes, the cell phone will be treated as a working condition fringe benefit and the value of the cell phone usage will be excluded from the employees wages.
The IRS explained that noncompensatory business purposes can include the employers need to contact the employee at all times for work-related emergencies, the employers requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employees need to speak with clients located in other time zones at times outside of the employees normal work day. It added that providing cell phones 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 do not qualify as being primarily for noncompensatory business purposes.
In addition to the business use of a cell phone, the IRS also announced that it will treat the value of any personal use of such a cell phone as a nontaxable?de minimis fringe benefit. Therefore, personal use will also be excluded if the business use of the phone is for noncompensatory business purposes.
These new administrative rules are effective for periods beginning January 1, 2010. They apply to both employer-provided cell phones, as well as reimbursement of employee-owned cell phones.
In light of these changes, employers should consider reviewing their cell phone policies. Many policies prohibited any personal use of employer-provided cell phones. Companies may want to reconsider those policies in light of the IRS new guidance. Employers should also ensure that any employer-provided cell phone or reimbursement is for a noncompensatory?business purpose and is not merely to promote morale, attract employees or to add to an employees compensation.
By: William Weissman