Changed cell phone tax treatment

In Notice 2011-72, the IRS provided guidance on the tax treatment of cell phones used for business purposes. The changes are long overdue, and are retroactive to the beginning of 2010.

Prior to the Small Business Jobs Act of 2010, cell phones were included under the section 280F definition of “listed property”. Before the Act, the strict substantiation requirements of section 274(d) had to be met to justify a business deduction for the cost of cell phones. The Small Business Jobs Act removed cell phones from the definition of listed property for tax years beginning after Dec. 31, 2009. However, the Act did not specifically alter the requirement that an employer-provided cell phone be treated as a fringe benefit that must be included in the employee’s gross income, unless an exclusion applies. The act also did not affect the potential treatment of an employer-provided cell phone as an excludible fringe benefit.

The IRS now agrees that the value of the business use of an employer-provided cell phone is excludible from an employee’s income as a working condition fringe to the extent that, if the employee paid for the use of the cell phone, the employee would be able to deduct such payment as a trade or business expense under section 162. The IRS will treat any personal use of such a cell phone as a de minimis fringe benefit, excludible from the employee’s income.

For the non-compensation treatment to apply, the cell phone must be provided to the employee for noncompensatory business reasons. Examples of such business reasons involve speaking with clients when away from the office, and being on-call when away from the office. A cell phone provided to promote employee morale or goodwill is not provided primarily for a noncompensatory business reason.

The notice says that, if an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the employee’s use of the cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludible from the employee’s income.


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