IRS Cell Phone Ruling Welcomed by Employers and Employees

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September 16, 2011

On September 14, 2011 the Internal Revenue Service issued Notice 2011-72, which gives non-taxable de minimis fringe benefit treatment to employer-provided cell phones (and presumably voice and data plans). Prior to 2010, cell phones were considered “listed property” for IRS purposes, and an employer who provided cell phones to its employees had heightened substantiation requirements in order for the value of the phone (and related voice and data plans) to be non-taxable. The IRS previously viewed cell phones as part business, part personal in their use, and unless the employer required detailed substantiation from the employee as to the breakdown of business versus personal, the IRS considered all of the use to be personal and therefore taxable. Beginning in 2010, cell phones were no longer listed property, but the income tax issue remained, the employee was supposed to be taxed on the value of the phone and services that were for personal use.
Notice 2011-72 provides that when an employer provides an employee with a cell phone primarily for “noncompensatory” business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment. The Notice is effective for all taxable years after December 31, 2009 (January 1, 2010 for individual taxpayers).
An employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, 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 possible substantial noncompensatory business reasons. 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 noncompensatory business purposes.
Employer-provided cell phones, smart phones, and other electronic communication devices have become the norm. Both employers and employees will appreciate the fact that the IRS has caught up with contemporary business practices and acknowledged that while these devices can be used for personal business, they are most often provided for legitimate business reasons.
If you have questions regarding the above, please contact Mary Ellen Schill, the author of this article, or any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware.

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