Close to one year after cell phones were removed from the “listed property” category of Code Sec. 280F, IRS has explained the practical consequences of the change. In sum, where an employer provides employees with cell phones primarily for noncompensatory business reasons, neither the business nor personal use of the phone result in income to the employee, and no recordkeeping of usage is required. And, in most instances, an employer’s reimbursement to employees for their providing a cell phone for bona fide business use won’t be taxable. The guidance applies for all tax years after Dec. 31, 2009.
New guidance for employer-provided cell phones. Notice 2011-72, provides that an employer is treated as having provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the phone. Examples include contacting the employee at all times for work-related emergencies, or the employee’s availability to speak with clients when he’s away from the office or call clients in other time zones after his normal workday is over. However, a cell phone provided to promote employee morale or goodwill, to attract prospective employees, or to provide additional compensation to employees is not provided primarily for noncompensatory business purposes.
When an employee is provided with a cell phone primarily for noncompensatory business reasons, IRS will treat his use of the cell phone for reasons related to the employer’s trade or business as an excludable WCFB. Also, solely for determining whether the WCFB rule in Code Sec. 132(d) applies, the substantiation requirements that the employee would have to meet in order to claim a deduction under Code Sec. 132 are deemed to be met. An employee’s personal use of a cell phone provided by the employer primarily for noncompensatory business purposes is excludable as a de minimis fringe benefit.
IRS stresses that the application of the WCFB and de minimis fringe benefit exclusions under Notice 2011-72, apply solely to employer-provided cell phones and should not be interpreted as applying to other fringe benefits.
Employer reimbursement of employee-provided phone. A Sept. 14, 2011, memo (“Interim Guidance on Reimbursement of Employee Personal Cell Phone Usage in light of Notice 2011-72”) for all field exam operations addresses the situation of employers that have substantial, noncompensatory business reasons for requiring employee use of personal cell phones in connection with their businesses, and reimburse them for their use. Here, examiners are told that they “should not necessarily assert that the employer’s reimbursement of expenses incurred by employees after December 31, 2009, results in additional income or wages to the employee.”
However, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone must not be a substitute for a portion of the employee’s regular wages. Examiners are told that arrangements replacing part of an employee’s previous wages with a reimbursement for business use of the employee’s personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses “should be examined more closely.”
RIA observation: IR 2011-92, is more to the point. It says that employers that require employees, primarily for noncompensatory business reasons, to use personal cell phones for business calls may treat reimbursements of employee expenses for reasonable cell phone coverage as nontaxable. It cautions, however, that this result won’t apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.
© 2011 Douglas Rutherford, CPA. All Rights Reserved. Douglas Rutherford is a nationally recognized CPA practicing in the real estate industry. He is the founder of Rutherford, CPA & Associates, and the President and CEO of RentalSoftware.com. He is also the developer of the national leading real estate investment analysis software, the Cash Flow Analyzer ® & Flipper’s ® software products. Doug earned his Masters of Taxation degree from Georgia State University, Atlanta, GA. Visit RealEstateAnalysisSoftwareBlog.com for more information and resources for successful real estate investing.