The IRS has issued new guidance designed to clarify the tax treatment of employer-provided cell phones and similar telecommunications devices. The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last year, that removed cell phones from the definition of “listed property,” a category under tax law that normally requires additional recordkeeping by taxpayers.

Prior to the legislation, when using cell phones one had to track business and personal use in order to claim deductions. The 2010 law removed these requirements for cell phones and similar communication devices, and treats employer-provided devices as tax-free fringe benefits, as long as certain requirements are met.

The IRS states that 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 not taxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment (IRS Notice 2011-72).
What does the IRS consider business reasons? The tax agency listed some possible scenarios:

  • An employer needs to contact the employee at all times for work related emergencies.
  • An employer requires that an employee be available to speak with clients at times when the employee is away from the office.
  • An employee needs to speak with clients located in other time zones at times outside of his or her normal work day.

“A cell phone provided to promote the morale or good will of employees, to attract a prospective employee, or as a means of furnishing additional compensation to an employee is not provided primarily for non-compensatory business reasons,” the IRS added.

The IRS also announced in a memo to its examiners a similar administrative approach that applies when businesses give cash allowances and reimbursements for work-related use of personally owned cell phones. Under this approach, employers that require employees to use personal cell phones for business may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as non-taxable. This treatment does not apply to unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.

Bottom line: When employers provide cell phones to employees or when employers reimburse employees for business use of 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; as such arrangements are generally taxable.