IRS Issues Guidance on Tax Treatment of Business Cell Phones

From the IRS

The IRS issued a notice on September 14 providing guidance on the tax treatment of employer-provided cell phones now that they have been removed from the definition of listed property (Notice 2011-72). The notice discusses the treatment of employer-provided cell phones as an excludible fringe benefit.

The IRS says it has received questions about the tax treatment of employer-provided cell phones and similar telecommunications equipment in the wake of changes enacted by the Small Business Jobs Act of 2010, P.L. 111-240. Prior to the act, cell phones were included under the Sec. 280F definition of listed property; for employers to deduct the cost of cell phones they provided to employees, the strict substantiation requirements of Sec. 274(d) had to be met.

The Small Business Jobs Act removed cell phones from the definition of listed property for tax years beginning after December 31, 2009. However, the IRS points out that the act did not otherwise alter the requirement that an employer-provided cell phone be treated as a fringe benefit, the value of which must be included in the employee’s gross income, unless an exclusion applies. The act also did not affect the potential treatment of an employer-provided cell phone as an excludible fringe benefit. (For more on this, see Martin and Adkins, “Congress Passes New Rules for Cell Phones, but How Much Did the Rules Change?” 42 The Tax Adviser 84 (February 2011).)

The IRS says that the value of the business use of an employer-provided cell phone is excludible from an employee’s income as a working condition fringe benefit to the extent that, if the employee paid for the use of the cell phone, the employee would be able to deduct such payment as a trade or business expense under Sec. 162.

For such treatment to apply, the cell phone must be provided to the employee for noncompensatory business reasons—for example, to speak with clients when away from the office. The notice says a cell phone provided to promote employee morale or goodwill is not provided primarily for a noncompensatory business reason.

The notice says that if an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the employee’s use of the cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludible from the employee’s income. The IRS will also treat any personal use of such a cell phone as a de minimis fringe benefit, excludible from the employee’s income.

The rules in Notice 2011-72 apply to any use of an employer-provided cell phone occurring after December 31, 2009.