IRS Releases New Guidance on Cell Phone Reimbursements
Posted 9-16-2011 | By Paul Dillon | Download Article
Employer-Provided Cell Phone Guidance
The IRS recently released Notice 2011-72 providing new guidance for the tax treatment of employer-provided cell phones. The notice explains when an employer provides an employee with a cell phone primarily for noncompensatory business purposes, the IRS will treat the employee's use of the cell phone as a working condition fringe benefit, the value of which is excludable from the employee's income. In addition, the IRS will treat the value of any personal use of an employer-provided cell phone as excludable from the employee's income. The notice is effective for all taxable years after December 31, 2009. Noncompensatory business reasons may include situations such as the employer's need to contact the employee at all times for work-related emergencies or the requirement the employee be available to speak with clients anytime.
Employer Reimbursement of Employee-Provided Cell Phones
In light of Notice 2011-72, the IRS also provided an audit guidance memo to IRS examiners regarding reimbursement of employee-provided cell phone usage for business reasons. The guidance explains the IRS should not necessarily assert that the employer's reimbursement of expenses incurred by employees after December 31, 2009 result in additional income or wages to the employee if the employer, for substantial noncompensatory business reasons, requires employees to maintain and use their personal cell phones for business purposes. The employee must maintain the type of coverage reasonably related to the needs of the employer's business and the reimbursement must be reasonably calculated to not exceed expenses the employee actually incurs in maintaining the cell phone.
Employees no longer have to break out their cell phone bills between personal and business use. Employees have to substantiate the amount of their cell phone coverage to the employer in a timely manner under an accountable plan in order for the reimbursement to be tax-free to the employee. For example, an employer has a business reason requiring an employee to provide their own cell phone for business purposes and the employee's basic cell phone coverage plan charges a flat-rate of $70 per month for a certain number of minutes for domestic calls. The full amount of $70 can be reimbursed tax free under the accountable plan rules, even if the basic coverage was also used for personal calls. The employee must provide a copy of the phone bill as support to the employer under the accountable plan rules.
For more information, please contact Paul Dillon, CPA, at pdillon@hlbtr.com or 651.407.5870.