The Internal Revenue Service has issued guidelines to clarify the tax treatment of employer-provided cell phones. The guidance relates to a provision in the Small Business Jobs Act of 2010, which removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.
The Notice provides guidance on the treatment of employer-provided cell phones as an excludible fringe benefit. According to the Notice, when an employer provides an employee with a cell phone primarily for non-compensatory 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.
Simultaneously, an IRS memo to its examiners announced a similar administrative approach that applies 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 non-compensatory 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 guidelines, when employers provide cell phones to their employees or 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, because such arrangements are generally taxable.
Details are in the memo and in Notice 2011-72, posted on IRS.gov.