The IRS has issued a notice clarifying the tax treatment of employer provided cell phones and similar telecommunications equipment for business purposes. The notice provides guidance on two key issues regarding employee cell phone use.
First, if an employer provides an employee with a cell phone for “noncompensatory business reasons,” the IRS will treat the employee’s use of the phone for business purposes as a “working condition” fringe benefit. This means that the value of this use is excludable from the employee’s income. Second, if the employee uses the employer provided cell phone for personal calls, the value of the personal use will also be excludable from the employee’s income as a de minimis fringe benefit.
According to the IRS, a cell phone is provided for “noncompensatory business reasons” if there are substantial business related reasons for giving the phone to the employee. These reasons can include the need to contact the employee at all times for work related emergencies or for the employee to contact clients while away from the office. However, a cell phone is not provided for “noncompensatory business reasons” if the cell phone is given to the employee to “promote the morale or good will of an employee,” to recruit a prospective employee, or to provide additional compensation to the employee.
The IRS clarified its position following questions it received following passage of the Small Business Jobs Act of 2010 which removed cell phones from the definition of listed property for taxable years beginning after December 31, 2009. When cell phones were included in the definition of listed property, employers and employees were required to keep detailed records of whether calls made on employer provided cell phones were for work or personal purposes. This put an enormous record keeping burden on employers. If no such records were kept, the value of the cell phone and the accompanying service were deemed “perks” that should have been treated as taxable income to the employee. As a result, numerous employers were being hit with back tax charges by the IRS. Some may remember that UCLA was slapped with nearly $240,000 in back taxes a few years ago.
The IRS’ clarification regarding the tax treatment of work issued cell phones is welcome news to employers. Now, employers and employees will not have to go through the onerous process of reviewing cell phone bills to separate work from personal calls and then include the value of the personal calls in the employee’s taxable income. Nonetheless, employers who already have a cell phone policy should review it to make sure it clearly states that the phone should be used for business purposes only. In addition, the policy should discourage employees from using employer provided cell phones for personal use. Finally, employers who do not have a cell phone use policy should adopt one.