The IRS Throws in the Towel on the Taxation of Employer-Provided Cell Phones
Employee Benefits Alert
On September 14, 2011, the IRS issued long awaited guidance on the tax treatment of cellular phones or other similar telecommunication equipment that employers provide to their employees primarily for noncompensatory business reasons. In Notice 2011-72 the IRS announced that if the cell phone is provided primarily for noncompensatory business reasons, the substantiation rules necessary to exclude the value of the use of the cell phone as a working condition fringe benefit will be deemed satisfied and any personal use of the cell phone will be deemed excludable as a de minimis fringe benefit. To satisfy the noncompensatory business reason requirement, an employer, for example, must only demonstrate the employer's need to contact the employee at all times for work-related issues or demonstrate that the employee has a need to contact clients or others when he or she is out of the office or outside of normal working hours. This broad exclusion will presumably apply to smartphones and Blackberries that are provided for noncompensatory business reasons.
Notice 2011-72 brings an end to an issue that has plagued employers for more than a decade. Prior to 2008, the IRS had been aggressively auditing employers for the failure to include the value of the use of cell phones as a taxable fringe benefit where the strict record-keeping rules applicable to "listed property" were not adhered to. On August 31, 2007, Miller & Chevalier requested guidance under the IRS's Industry Issue Resolution Program, which helped spark Congressional interest to resolve this issue. The Small Business Jobs Act of 2010 removed cell phones from the definition of listed property. The Joint Committee explanation noted that Treasury has authority to determine whether employer-provided cell phones qualify as a working condition fringe benefit or a de minimis fringe benefit. Notice 2011-72 has responded to this Congressional directive by excluding the value of the use of cell phones whenever the cell phone is provided primarily for noncompensatory business reasons. The notice is effective for all taxable years after December 31, 2009.
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