IRS Pulls the Plug on Efforts to Tax Employer-Provided Cell Phones


On September 14, 2011, the Internal Revenue Service (IRS) issued guidance indicating that employers can provide cell phones and similar telecommunications equipment to employees on a nontaxable basis, as long as the devices are provided primarily for noncompensatory business reasons. In recent years, the tax treatment of such devices was uncertain, and before 2009, the IRS had generally viewed the personal portion of employer-provided cell phone usage as taxable.

In Notice 2011-72, the IRS set out its position with respect to an employer that provides a cell phone or similar telecommunications equipment (collectively referred to in the Notice, and in this summary, as “cell phones”) to an employee primarily for noncompensatory business reasons. The IRS stated that the use of the cell phone is nontaxable to the employee as a working condition fringe benefit with respect to the business use and as a de minimis fringe benefit with respect to any personal use. Additionally, the employer is not required to substantiate the business and personal use, which would normally be necessary under the working condition fringe exclusion. It appears that the reference in the Notice to “similar telecommunications equipment” would include an iPhone, BlackBerry, and similar devices. The Notice is effective retroactively to taxable years beginning after December 31, 2009.

The IRS also issued a Memorandum to its examiners, announcing that a similar analysis applies with respect to employer reimbursements for cell phone expenses where the employer requires, for substantial noncompensatory business reasons, that the employee maintain and use their personal cell phone for business reasons. The reimbursement must be for cell phone coverage that is reasonably related to the needs of the business (e.g., an international plan would not be appropriate for a domestic-only business), and the reimbursement must be reasonably calculated not to exceed the employee’s expenses. The Memorandum refers only to cell phones and does not include a reference to “similar telecommunications equipment” as does the Notice.

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