By Ralph E. DeJong, Michael N. Fine and Ira B. Mirsky The Internal Revenue Service recently issued a notice specifying
that the business and personal use of an employer-provided cell phone,
or other similar telecommunications equipment (e.g., PDAs and
BlackBerrys), will generally be treated as nontaxable to the employee,
if the employer has provided the cell phone primarily for
noncompensatory business reasons. The tax relief takes effect immediately.
On September 14, 2011, the Internal Revenue
Service (IRS) issued Notice 2011-72 (Notice), which provides
long-awaited relief concerning the tax treatment for employee use of
employer-provided cellular telephones or other similar
telecommunications equipment (e.g., PDAs and BlackBerrys). The Notice provides that:
The IRS guidance specifies that the
business and personal use of an employer-provided cell phone will
generally be treated as nontaxable to the employee, if the employer has
provided the cell phone primarily for noncompensatory business reasons.
Because it applies for taxable years beginning after December 31, 2009,
the tax relief provided under the IRS Notice takes effect immediately.
Under prior law, cell phones were treated as "listed property" for purposes of Internal Revenue Code Section 280F.
As a result, cell phones were generally required to be provided for the
"exclusive benefit" of the employer, and the employer deduction for the
cost of any business use was subject to onerous substantiation
requirements. Further, any personal use of an employer-provided cell phone was previously treated as a taxable benefit to employees.
During fall of 2010, cell phones were
removed from the Code's definition of "listed property," as part of the
Small Business Jobs Act of 2010. This change eliminated
the onerous substantiation requirements for employers to be entitled to
deduct the costs associated with employer-provided cell phones.
However, until Notice 2011-72, employers were left to draw inferences
regarding the corresponding tax treatment to employees in connection
with either their business use, or limited personal use of
employer-provided cell phones.
For further discussion on the removal of cellular telephones or
other similar telecommunications equipment from the Code's definition
of "listed property," see Small Business Jobs Act to Simplify Taxation of Cell Phone Usage.
The Notice makes it clear that when an
employer provides an employee with a cell phone primarily for
noncompensatory business reasons, the IRS will deem the employee to have
satisfied the substantiation requirements for any business-related use
to be excludable from compensation as a working condition fringe
benefit. In addition, the Notice provides that the IRS
will also treat any personal use of an employer-provided cell phone as a
nontaxable de minimis fringe benefit. (This
position is consistent with the long-standing tax treatment of
occasional personal telephone calls from an employee's desk phone as a
nontaxable, de minimis fringe benefit.)
Concurrent with the release of Notice
2011-72, the IRS has also issued a memo that provides audit guidance to
its examiners for addressing the tax treatment of the employer
reimbursement for the business use of an employee's personal cell phones
on audit. The memorandum provides examples of
"substantial noncompensatory business reasons" for reimbursing employees
for the business use of their personal cell phones. The
memorandum also provides examples to help evaluate whether employee cell
phone reimbursement arrangements are in excess of the cellular
communication needs of the employer's business and, thus, triggering
additional taxable wages to the employee.
What Should Employers Do Now?
Employers that provide or pay for cell
phones or other telecommunications equipment for employees should be
sure to document the substantial business reasons for providing doing
so. That rationale should be assessed to ensure it makes
it sufficiently clear that the telecommunications equipment is provided
primarily for noncompensatory business purposes.
content of this article is provided solely for informational purposes.
It is not intended as, and does not constitute, legal advice. The
information contained herein should not be relied upon or used as a
substitute for consultation with legal, accounting, tax, career, and/or
other professional adivsers. This article is provided "AS IS," and
McDermott Will & Emery makes no representation or warranty of any
kind with respect to its contents. McDermott Will & Emery expressly
disclaims all representations and warranties, whether express or
implied, including, but not limited to, warranties of merchantability,
fitness for a particular purpose, and non-infringement. In addition,
McDermott Will & Emery does not represent or warrant that the
content of this article is timely, accurate or complete.
article is republished with the permission of McDermott Will &
Emery LLP. Further duplication without the permission of McDermott Will
& Emery LLP is prohibited. All rights reserved.
Discover the features and benefits of LexisNexis® Tax Center
For quality Tax & Accounting research resources, visit the LexisNexis® Store
For more information about LexisNexis products and
solutions connect with us through our corporate