The IRS has recently issued guidance designed to clarify the tax treatment of employer-provided mobile phones as an excludable fringe benefit.
Previously, cell phones had not been considered ‘listed property’ under Internal Revenue Code (IRC) Section 280F; this meant that an employer did not have to maintain records relating to the use of the property to obtain a deduction on the employer’s return. However, no guidance was provided as to the tax impact to the employee who was provided a cell phone (or a reimbursement for cell phone costs) by the employer.
The IRS, in Notice 2011-72, has now provided guidance on this issue. The guidance provides that if the employer provides the employee with a cell phone primarily for noncompensatory business purposes, costs related to the cell phone will be treated as a working condition fringe benefit under IRC 132(d) and will not be subject to federal income tax.
To obtain noncompensatory business purpose treatment of a cell phone, the employer needs to establish, on internal records, that there are substantial business-related reasons to provide an employee with a cell phone, aside from providing compensation to the employee. Examples could include making the employee available to clients/co-workers when away from the office, emergency availability and giving the employee the ability to talk to clients/co-workers after the normal workday ends. If this test is met, any personal use of the cell phone will also not be taxable as a ‘de minimus fringe benefit’ under IRC 132(a).
The guidance is effective for all tax years beginning after December 31, 2009; therefore, employees who did report taxable income on their 2010 federal income tax returns as a result of employer-provided cell phones should consider applying for a refund of related taxes. Employers who satisfy the noncompensatory business purpose test should make sure that the employees’ 2011 Forms W-2 do not include any cell phone related income.
We would be pleased to assist you with questions related to benefits provided to employees. For more information on this topic, post a comment below or contact our Compensation & Benefits Advisory Services Group at 440-449-6800.