In May, 2011, we issued the article, “Employer-Provided Cell Phones – What’s the Latest?” describing the existing IRS guidelines related to employer-provided cell phones and the practical implications. At the time, the guidelines were somewhat unclear. Fortunately, the IRS has responded to the numerous questions they have received regarding the proper tax treatment of employer-provided cell phones – just in time for year-end. On September 14, 2011, the IRS issued Notice 2011-72 relaxing the rules related to employer-provided cell phones, and a memo providing internal interim guidance on the reimbursement of cell phone charges to employees using their personal cell phones for business. This new guidance provides us with some relief regarding the proper tax treatment going forward.
A Quick Review of Previous Guidelines Our previous article on this subject focused on the fact that cell phones were removed from listed property by the Small Business Jobs Act of 2010, thereby relaxing the strict recordkeeping requirements that had been in place since 1989. At the time of our article, business use of cell phones was reimbursable by employers and not taxable to employees, while any personal use was taxable and includable on an employee’s W-2. We recommended that employers keep copies of the bills for any cell phone expenses they pay for and have employees estimate the proportion of business and personal use. We also suggested having a written policy on cell phone use and provided suggestions regarding capitalization of cell phones, reporting any taxable reimbursements on the employee’s W-2, cost allocation, and 990 reporting.
Recent Guidance Issued by the IRS On September 14, 2011, the IRS issued Notice 2011-72 providing guidance on the tax treatment of cell phones provided to employees for business purposes. This guidance indicates that the value of the business use of an employer-provided cell phone can be considered a “working condition fringe benefit” as defined in section 132(d) of the internal revenue code (IRC). This was allowed previously, as long as there was some documentation to substantiate the proportion of business use. However, there are two major changes in the new guidance.
First, the new guidance specifies that as long as the employer has provided the employee with a cell phone primarily for noncompensatory business purposes, the substantiation requirements are considered satisfied. What does “primarily for noncompensatory businesses purposes” mean? It means that there must be reasons relating to the business, other than providing additional compensation to the employee, for providing the employee with a cell phone. Valid reasons include the employer’s need to be able to contact the employee at any time for business-related emergencies, and the employee’s requirement to be available to clients when the employee is out of the office, or outside of normal working hours. Invalid reasons include providing a cell phone to attract a prospective employee, as a way of providing a bonus or additional compensation, or to promote employee morale.
The other major change in the new guidance is that any personal use of a cell phone provided by an employer for noncompensatory business purposes is considered a “de minimis”, or insignificant, fringe benefit, and is not taxable to the employee. To clarify, this means that as long as the noncompensatory business purpose criteria is met, the employer does not need to include the value of the personal use of the phone on the employee’s W-2.
Notice 2011-72 does not address reimbursements employees receive from employers for business use of personal cell phones. However, an internal memo was issued by the IRS to its auditors to provide guidance regarding such situations. The memo indicates that the same type of treatment applies to such reimbursement situations, as long as the following requirements are met:
- The employee is required to use their personal cell phone for noncompensatory business reasons.
- The employee must maintain reasonable cell phone coverage as needed for business purposes (for example, a flat-rate monthly plan that includes only services required for the business).
- The reimbursement can’t exceed the amount actually paid by the employee and should be consistent (if the reimbursement is normally $100 per month from January – November, it shouldn’t be $600 in December).
- The reimbursement must not be a substitute for a portion of the employee’s regular wages.
It is important to note that this is an internal memo and not an official notice or ruling. Employers should continue using their existing procedures related to cell phone reimbursements until an official notice is issued by the IRS.
Practical Implications Here are the implications of the new guidelines, and the relevant changes in procedures that employers should consider:
Have a written policy regarding employer-provided cell phones in the employee manual and be able to demonstrate the noncompensatory business purpose requirement is met.
 Department of the Treasury, Internal Revenue Service, Notice 2011-72
Tax Treatment of Employer-Provided Cell Phones, 2011.
 Department of the Treasury, Internal Revenue Service, Memorandum for
all Field Examination Operations, Subject: Interim Guidance on Reimbursement
of Employee Personal Cell Phone Usage in light of Notice 2011-72, 2011.