The Internal Revenue Service (IRS) has recently issued guidance designed to clarify the tax treatment of employer-provided cell phones.
The guidance relates to a provision in the Small Business Jobs Act of 2010, that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers. According to the clarification, 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 IRS also announced, in a memo to its audit examiners, a similar administrative approach that applies with respect to arrangements common to small businesses that provide 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 to reimbursements made as a substitute for a portion of the employee’s regular wages.
The 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.
In light of these changes, employers should review their cell phone policies to ensure that any employer-provided cell phone or reimbursement is for a noncompensatory business purpose and is not merely to promote morale, attract employees or to add to an employee’s compensation.