Exclusion of Employer-Provided Cell Phones from Gross Income

Editor: Michael D. Koppel, CPA, MSA, MBA, PFS, CITP

Expenses & Deductions

A recent IRS notice has cleared up confusion about whether employers may exclude the value of cell phones provided for employees’ use from gross income.

Before December 31, 2009, cell phones were considered listed property under Sec. 280F. Under those rules and Sec. 274(d), a business taxpayer was required to substantiate with detailed records the amount of the expense, the use of the phone, the business purpose, and the business relationship to the person using the phone to deduct its cost. Cell phones were added to listed property for tax years after 1989, before they became a ubiquitous business accessory. This created burdensome recordkeeping of all monthly cell phone bills and sufficient corroborating evidence relating to business use. The Small Business Jobs Act of 2010, P.L. 111-240, adapted the law to the current business atmosphere of extensive cell phone use by removing cell phones from the listed property category, although it gave no guidance to employees regarding use of an employer-provided cell phone as a potentially taxable fringe benefit.

Notice 2011-72 states that employer-provided cell phones can be considered a working condition fringe benefit excludible from the employee’s gross income under Sec. 132(a)(3). A working condition fringe benefit is defined in Sec. 132(d) as any property or services provided to an employee that, if paid for by the employee, would be allowable as a deduction for a trade or business expense or depreciation allowance under Sec. 162 or 167.

This recent IRS notice further explains that for an employer-provided cell phone’s value to be considered a working condition fringe benefit, there must be substantial reasons for having the cell phone relating to the employer’s business, other than providing compensation to the employee. Reasons for an employee requiring a cell phone include the employer’s needing to contact the employee at all times for work-related emergencies or the employee’s needing to be available to speak with clients at any time. Assuming the employee also uses the cell phone for personal use, the notice excludes this value as a nontaxable de minimis fringe benefit, reasoning that it is so small that accounting for it would be unreasonable or administratively impracticable. Simultaneously with the notice, the IRS notified its examiners (SBSE-04-0911-083) that where an employer requires employees to use their personal cell phones for reasonable, noncompensatory business purposes and the employees are reimbursed for the expense, those reimbursements are generally nontaxable if they are reasonably calculated not to exceed the expense actually incurred and are not a substitute for a portion of the employee’s regular wages.

EditorNotes

Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

For additional information about these items, contact Mr. Koppel at (781) 407-0300 or mkoppel@gggcpas.com.

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