IRS Issues Cell Phone Guidelines

The IRS issued long awaited guidance last week on the tax treatment of employer-provided cell phones. Notice 2011-72 provides that, for tax years beginning after December 31, 2009, the IRS will treat the employees' use of employer-provided cell phones for noncompensatory business purposes as a working-condition fringe benefit. This means that the value of the cell phone use will not be subject to income tax under Internal Revenue Code Sections 132(d) and (e).

In order for the working-condition fringe benefit test to be met, substantial reasons for providing the employee with the cell phone must exist. Examples of substantial reasons provided in the notice include: (1) the ability to reach the employee at all times for work-related emergencies; (2) the need to contact clients at times when the employee is away from the office; and (3) the need for the employee to use the cell phone to speak to clients in other time zones before and after work hours. Cell phones provided to employees to improve morale and/or provide additional compensation are not subject to the working-condition fringe benefit exclusion from taxes.

Once the use of the employer-provided cell phone is considered to be a working-condition fringe benefit, the employee’s use of the cell phone for personal reasons may be treated as excludable from the employee’s income as a de mininimis fringe benefit under IRC Section 132(e).

The IRS’ change in approach to employer-provided cell phones was not possible until the Small Business Jobs Act of 2010 removed cell phones from the definition of listed property. Although this change has been much anticipated, organizations must take care to establish and document the noncompensatory business purposes for providing cell phones to employees. Such documentation may include language in employment contracts, job descriptions and personnel manuals documenting the business reasons for providing employees with cell phones.