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Personal Use of Employer-Provided Cell Phones Generally Non-taxable Under New Guidance

October 06, 2011

Close to one year after cell phones were removed from the “listed property” category of Code Sec. 280F, IRS has explained the practical consequences of the change. In sum, where an employer provides employees with cell phones primarily for non-compensatory business reasons, neither the business nor personal use of the phone results in income to the employee, and no recordkeeping of usage is required. And, in most instances, an employer's reimbursement to employees for their providing a cell phone for bona fide business use won't be taxable. The guidance applies for all tax years after Dec. 31, 2009.

Under Code Sec. 280F, there's no deduction for listed property unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer's own statement: the amount of the expense or other item; the use of the property; the business purpose of the expense or other item and the business relationship to the taxpayer of persons using the property.

Cell phones used to be listed property, but, for tax years beginning after Dec. 31, 2009, the Small Business Jobs Act of 2010 (the Act, P.L. 111-240), removed cell phones and other similar telecommunications equipment from the “listed property” category under Code Sec. 280F . The problem was that the Act didn't deal with the consequences of personal use of an employer-provided cell phone, or an employer's reimbursement of an employee-provided cell phone for business use.

The relevant statutory rules are as follows:

  • Ordinary and necessary business expenses are deductible under Code Sec. 162 . However, under Code Sec. 262(a), no deduction is allowed for personal, living, or family expenses, unless otherwise provided.
  • An employee generally must include in gross income the amount by which the fair market value of a fringe benefit exceeds the sum of (a) the amount, if any, paid for the benefit by or on behalf of the employee, and (b) the amount, if any, specifically excluded from gross income by some other section of the Code. But gross income does not include a working condition fringe benefit (WCFB), which is defined as any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec. 167.
  • If, under Code Sec. 274 or another Code section, certain substantiation requirements must be met in order for a deduction under Code Sec. 162 or Code Sec. 167 to be allowable, then those substantiation requirements apply in determining whether a property or service is excludable as a WCFB. The Code Sec. 274 substantiation requirements are satisfied by adequate records or sufficient evidence corroborating the employee's own statement. As a result, such records or evidence provided by the employee, and relied upon by the employer to the extent permitted by the Code Sec. 274(d) regs, are enough to substantiate a WCFB.
  • Code Sec. 132(a)(4) provides a specific exclusion from gross income for de minimis fringe benefits. A de minimis fringe benefit is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees.

According to the Committee Report to the Act, the post-2009 “delisting” of cell phones didn't affect IRS' authority to determine the appropriate characterization of cell phones as a WCFB under Code Sec. 132(d) , and didn't affect IRS' authority to determine that the personal use of cell phones that are provided primarily for business purposes may qualify as a de minimis fringe benefit.

After the Act's passage, we observed that IRS may well declare an employee's personal use of an employer-provided cell phone to be a tax-free de minimis fringe benefit (see Weekly Alert ¶ 42 09/30/2010 ), and that's just what IRS has now done.

New guidance for employer-provided cell phones. Notice 2011-72, provides that an employer is treated as having provided an employee with a cell phone primarily for non-compensatory business purposes if there are substantial reasons relating to the employer's business, other than providing compensation to the employee, for providing the phone. Examples include contacting the employee at all times for work-related emergencies, or the employee's availability to speak with clients when he's away from the office or call clients in other time zones after his normal workday is over. However, a cell phone provided to promote employee morale or goodwill, to attract prospective employees or to provide additional compensation to employees is not provided primarily for non-compensatory business purposes.

When an employee is provided with a cell phone primarily for non-compensatory business reasons, IRS will treat his use of the cell phone for reasons related to the employer's trade or business as an excludable WCFB. Also, solely for determining whether the WCFB rule in Code Sec. 132(d) applies, the substantiation requirements that the employee would have to meet in order to claim a deduction under Code Sec. 132 are deemed to be met. An employee's personal use of a cell phone provided by the employer primarily for non-compensatory business purposes is excludable as a de minimis fringe benefit.

IRS stresses that the application of the WCFB and de minimis fringe benefit exclusions under Notice 2011-72, apply solely to employer-provided cell phones and should not be interpreted as applying to other fringe benefits.

Employer reimbursement of employee-provided phone
A Sept. 14, 2011 memo (“Interim Guidance on Reimbursement of Employee
Personal Cell Phone Usage in light of Notice 2011-72”) for all field exam operations addresses the situation of employers that have substantial, non-compensatory business reasons for requiring employee use of personal cell phones in connection with their businesses, and reimburse them for their use. Here, examiners are told that they “should not necessarily assert that the employer's reimbursement of expenses incurred by employees after December 31, 2009 results in additional income or wages to the employee.”

However, the employee 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 employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee's personal cell phone must not be a substitute for a portion of the employee's regular wages. Examiners are told that arrangements replacing part of an employee's previous wages with a reimbursement for business use of the employee's personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses “should be examined more closely”.

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