IRS Issues Guidance On Employer Provided Cell Phones

The IRS has recently issued Notice 2011-72 which provides guidance on the tax treatment of cell phones that employers provide to their employees primarily for business purposes.   Section 2043 of the Small Business Jobs Act of 2010, removed cell phones from the definition of listed property for taxable years beginning after December 31, 2009.  Many employers provide their employees with cell phones primarily for excludable business reasons and the value of the business use of an employer-provided cell phone is now generally excluded from an employee’s income.

An employer will be considered to have provided an employee with a cell phone primarily for an excludable business purpose if there are substantial reasons, other than compensation, that relate to the employer’s business for providing the employee with a cell phone.  For example, the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day are all possible excludable business purposes.  Conversely, a cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for an excludable business purposes.

The notice provides that, when an employer provides an employee with a cell phone primarily for excludable 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 excluded from the employee’s income. In addition, the IRS will treat the value of any personal use of a cell phone provided by the employer primarily for business purposes as excluded from the employee’s income as a de minimis fringe benefit.

The IRS notes that the application of the working condition and de minimis fringe benefit exclusions under the notice apply solely to employer-provided cell phones and should not be interpreted as applying to other fringe benefits.  If you are a business owner who provides or is looking to provide fringe benefits to your employees, contact a knowledgeable tax attorney to ensure you understand the tax consequences.