New Tax Treatment for Cell Phones

09.27.2011
HR & Safety

The IRS has issued guidance clarifying the tax treatment of employer-provided cell phones.

The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last fall, that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

In Notice 2011-72, the IRS states 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 an excludable fringe benefit, nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

At the same time, in a memo to its examiners, the agency has announced a similar administrative approach to arrangements where small businesses give cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or made as a substitute for a portion of the employee’s regular wages.

According to the IRS, examples that would qualify as noncompensatory business reasons include: an employer needing to contact an employee at all times for work-related emergencies; a requirement that the employee be available to speak with clients when away from the work site; and a need to speak with clients who are in other time zones at times outside the normal work day hours.

The new guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.

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