For many years, IRS has stridently insisted that the value of personal use of cell phones provided by an employer to its employees is taxable income. However, on September 14, 2011, the agency issued Notice 2011-72 and a companion field audit memo, announcing that it would no longer assert that position where the employer has demonstrated a business need for providing the phones.
For tax years beginning prior to 2010, IRS took the position that the value of an employee’s employer-provided cell phone use was taxable income unless the employer maintained the stringent records applicable to listed property. Thankfully, the Small Business Jobs Act of 2010 removed cell phones from the definition of listed property; but Congress did not otherwise direct IRS to alter its position that an employer-provided cell phone is a fringe benefit, at least a portion of which may be subject to tax.
Notice 2011-72 states that, when an employer provides a cell phone to an employee primarily for substantial noncompensatory business reasons, the employee’s personal use of the phone will be treated as a working condition fringe benefit, the value of which will be excluded from the employee’s income. Further, in this situation, the employee will no longer be required to meet any substantiation or recordkeeping requirements.
IRS also provides examples that constitute substantial, noncompensatory business reasons.
- 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 when the employee is away from the office.
- The employee’s need to speak with clients located in other time zones outside of normal business hours.
The Notice has a retroactive effective date, as it applies to employer-provided cell phone use occurring after December 31, 2009.
At the same time that it issued Notice 2011-72, IRS also published a memorandum to its field auditors that extends the rules in the Notice to an employer’s reimbursement of an employee for the business use of a personal cell phone. In addition, the memorandum states that the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurs in maintaining the cell phone.
An example of a reimbursement arrangement that meets the requirements: The employee uses the cell phone for both business purposes and personal purposes, and the employee’s basic coverage plan charges a flat-rate per month for a certain number of minutes for domestic calls. The employer reimburses the employee for the monthly basic plan expense to enable the employee to maintain contact with business clients throughout the United States after hours.
An example of a reimbursement arrangement that does not meet the requirements: The employee is reimbursed for international or satellite cell phone coverage, and the employee’s clients are in the same geographic area as the employee.
Every employer that has adopted a policy relating to cell phone use should review the policy to make sure that the stated purposes for providing cell phones comport with the language in Notice 2011-72 and the companion IRS field audit memo.
Employers that have not adopted a cell phone policy should consider doing so.
For assistance in drafting, reviewing, and analyzing employee fringe benefit plans and policies, please contact the authors or any member of the McGuireWoods Employee Benefits team.