In an attempt up clear up confusion about the tax treatment of employer–provided cell phones, the Internal Revenue Service (the “IRS”) has issued Notice 2011-72. The Notice was issued on September 14, 2011, and the tax exclusion rules described below are effective for all cell phone usage after December 31, 2009. This new guidance likely will be appreciated both for the resulting clarity (or at least increased clarity) and for the position taken by the IRS. Note that the guidance in the Notice is limited expressly to cell phones.
Under the Notice, the value of the business use of an employer-provided cell phone is excludable from the employee’s income as a working condition fringe benefit under the provisions of Section 132(d) of the Internal Revenue Code (the “Code”) provided that the cell phone is provided to the employee primarily for “noncompensatory business reasons,” as that term defined in the Notice. A cell phone will be considered to be provided primarily for “noncompensatory business reasons” if there are substantial reasons relating to the employer’s business (other than providing compensation to the employee) for providing the employee with the cell phone. In the Notice, the IRS provided examples of acceptable business reasons for providing cell phones to employees, including:
- 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 at times when the employee is away from the office; and/or
- the employee’s need to speak with clients located in other time zones outside the employee’s normal work day.
On the flip side (note the tribute to the old style “flip” cell phones), the Notice identifies some examples when providing cell phones would not be considered to be for “noncompensatory business reasons,” including:
- providing the cell phones to promote the morale or good will of employees;
- providing the cell phones to attract prospective employees; or
- providing the cell phones as a means of furnishing additional compensation to employees.
As an added advantage, the Notice states that the value of an employee’s personal use of a cell phone provided by the employer primarily for “noncompensatory business reasons” also is excludable from the employee’s gross income (such usage would be treated as a excludable de minimis fringe benefit under Section 132(e) of the Code).
The Notice finally states that the substantiation requirements under Code Section 162 for working condition fringe benefits are deemed to be satisfied when cell phones are provided to employees for “noncompensatory business reasons,” and thus employers should be able to deduct the costs for providing those cell phones to their employees. The deduction rules are effective for all taxable years beginning after December 31, 2009.
Recognizing that the Notice does not cover the usage of an employee’s personal cell phone, the IRS has also released a Memorandum for All Field Examination Operations (the “Examination Memo”), which covers the tax treatment of reimbursements received by employees from their employers related to the use of their personal cell phones for business purposes. The Examination Memo is intended to provide audit guidance to examiners regarding the reimbursement of such costs by employers. These reimbursements would be excludable from an employee’s gross income to the extent that:
- due to “noncompensatory business reasons”(note that the standard for “noncompensatory business reasons” seems to be the same standard as set forth in the Notice) the employee is required to maintain and use his or her personal cell phone for business purposes;
- the type of cell phone coverage is reasonably related to the needs of the employer’s business;
- the reimbursement is reasonably calculated so that it does not exceed expenses the employee actually incurred in using the cell phone; and
- the reimbursement must not be a substitute for a portion of the employee’s regular wages.
Given the welcomed clarity offered by the Notice and by the Examination Memo, this is an excellent time for employers to review their policies related to the usage of cell phones by employees (whether via employer-provided cell phones or through employer reimbursement of expense incurred by employees related to the usage of their personal cell phones). Employers should determine whether any adjustments to those policies may be appropriate, and further should determine whether any prior reluctance to offer employer-provided cell phones should be reconsidered in light of this new guidance. In addition employers need to recalibrate previous determinations relating to imputing taxable income to their employees connected with the usage of cell phones for business purposes. As always, we would be happy to assist in such a review of existing company policy.