Taxation of Employer-Provided Cell Phones: Who Benefits?

Taxation of Employer-Provided Cell Phones: Who Benefits?

When I was practicing law in the 1990s, the large private law firm I worked for decided to follow the lead of the technology-based Silicon Valley firms and issue what was likely the first generation of Blackberry smartphones to associates and partners.  It seemed like such a perk initially:  A firm-provided cell phone with Internet functionality!  The firm would pay the service and contract fees!  We could check work e-mail anywhere!  Wait a minute!  Clients could reach us anywhere, and they came to expect us to be "plugged in" and checking e-mail at all hours of the day and night.  After just a couple of weeks, it became clear that the Blackberries were not issued for our own personal benefit.  This was an extension of our desktop and, in the end, a benefit for our employer.  Never mind that we could not view, open, or revise any attachments with these early mobile e-mail devices.  We would not have to wait long for that function to arrive.

Documentation requirements eased.

Under prior IRC Section 280F, employers could not take a deduction for cell phones provided to employees unless business purpose and use were significantly documented and substantiated.  Employees were to include the value of any personal use of the cell phones as well.  With the passage of the Small Business Jobs Act of 2010, P.L. 111-240, employer-provided cell phones were removed from the definition of listed property under IRC Section 280F(d), which means the substantiation requirements for business purpose and use are eliminated.  This change does not automatically exclude the value of employer-provided cell phones from income.  They must still qualify as a fringe benefit (working condition or de minimis fringe) in order to be excluded from employee income.

What qualifies as a substantial business reason?

Guidance issued by the IRS in Notice 2011-72 provides that if there are "substantial business reasons," the provision of an employer-provided cell phone will qualify as a working condition fringe benefit and the substantiation requirements are deemed satisfied.

Several examples of acceptable reasons are provided, including

  1. the employer's need to contact the employee for work-related emergencies;
  2. clients' need to contact employees when they are away from the office; and
  3. employees' need to speak with clients located in other time zones outside of normal work day hours.

Examples of reasons that would not qualify as acceptable are:

  1. to promote goodwill or morale; or
  2. to attract a prospective employee by furnishing what is essentially additional compensation.

When employers reimburse employees for the business use of a personal cell phone, a similar analysis is followed to determine if this is also excludable from income.  See IRS Memorandum SBSE-04-0911-083 (Sept. 14, 2011) (applicable to expenses incurred after December 31, 2009).

Who benefits?

Pursuant to this new guidance, the Blackberry smartphones I mentioned above for law firm partners and associates would most definitely fall under the “excluded from income” category as a working condition fringe.  Although it is not part of the IRS test under IRC Section 280F, Notice 2011-72, or the recent IRS Memorandum sent to examiners, this writer suggests the appropriate analysis for determining exclusion from income is essentially, “Who Benefits?  If it is the employer who largely benefits from the employee having the employer-provided cell phone, then this test would deem it to be a cell phone issued for non-compensatory business reasons and would exclude it from the employee’s income (with appropriate reduction by employee’s personal use).  If, on the other hand, the phone is largely to benefit the employee, then it should be included in the employee’s income.  You might argue that this ad hoc test could lead to the conclusion that cell phones issued for “morale or good will” should be excluded from employee income.  In my opinion, if the employer’s business ultimately infringes upon the employee’s personal time, that “morale or good will” is very likely to be pretty minimal for the employee.  Ultimately in that case, this is a cell phone issued for the employer’s benefit and for the individual’s benefit as an “employee,” not just for that person’s everyday life benefit as an individual citizen.

Are employer-provided cell phones ever in the sole benefit of the employee?  If no employer, client, or co-worker ever calls you on that phone during working or non-working hours to discuss a business-related item, then I’d say yes.  Otherwise, I’d say it’s not really the employee who benefits from this amenity, it’s the employer.  Proletariats of the world, what do you think?

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