According to Internal Revenue Service (IRS) Notice 2011-72 (the Notice), the value of the usage of a cell phone or similar telecommunication device that is provided by an employer to its employee primarily for noncompensatory business purposes (a business cell phone) is excluded from the employee's income. This guidance applies retroactively to business cell phone usage after December 31, 2009.
The value of the use of a business cell phone for reasons related to the employer's trade or business is excluded from an employee's gross income as a working condition fringe benefit, and the substantiation requirements that the employee would otherwise be required to satisfy for that exclusion to apply are deemed to be satisfied. With regard to an employee's personal use of a business cell phone, the value of any such personal use is excluded from the employee's income as a de minimis fringe benefit.
"Noncompensatory business purposes" exist for providing a cell phone or other telecommunication device to an employee if there are substantial reasons relating to the employer's business for providing the phone or device, other than providing compensation to the employee. The Notice provides the following examples of possible noncompensatory business purposes:
- 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
- The employee's need to speak with clients located in other time zones at times outside of the employee's normal work day.
Using cell phones and other similar devices as a means of promoting employee morale or fostering goodwill and as a means of attracting prospective employees are specifically mentioned in the Notice as being business purposes that would not satisfy the requirements for the income exclusion discussed in the Notice. Such business purposes would be considered compensatory.
This new guidance will not likely change the manner in which most employers treat business cell phones for tax purposes. However, in this day when employer-provided tablet devices and the "latest" smart phones are often seen as perquisites, employers should be clear with employees about the reasons why such devices are being provided and should consider how the provision of such devices is documented to ensure that the favorable tax treatment set forth in the Notice is applicable.
Please click the following link for a copy of IRS Notice 2011-72.
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