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IRS Issues Guidance on Tax Treatment of Cell Phones

Agency provides recordkeeping relief for small business

The U.S. Internal Revenue Service issued guidance on Sept. 14, 2011, to clarify the tax treatment of employer-provided cell phones.

The guidance, IRS Notice 2011-72, relates to a provision in the 2010 Small Business Jobs Act that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

Notice 2011-72 provides guidance on the treatment of employer-provided cell phones as an excludible benefit. The notice provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, generally the business and personal use of the cell phone is nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

Simultaneously with Notice 2011-72, the IRS announced in a memo to its 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.

Under the guidance, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. 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 consider reviewing their cell phone policies," commented William Weissman, an attorney at Littler Mendelson P.C., in Walnut Creek, Calif. "Many policies have prohibited any personal use of employer-provided cell phones. Companies may want to reconsider those policies in light of the IRS’ new guidance," he noted, adding, "Employers should also 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.​


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