Vernoia, Enterline + Brewer, CPA LLC

The IRS has announced in its recent Notice 2011-72, that it will not tax employees’ personal use of their employer-provided cell phones. In other words, all usage is nontaxable as long as the employer provided the phone primarily for noncompensatory business reasons. Likewise, employer reimbursements to their employees for using personal cell phones for business are non-taxable.

Phone Usage as a Fringe Benefit

Generally fringe benefits are taxable unless specifically excluded from income by law. The IRS views that personal use of an employer-provided cell phone is essentially an excludable de minimis fringe benefit, meaning its value would be too small to make it administratively worth the effort of collection.

In order for personal use to qualify as a de minimis fringe benefit in this instance, the IRS requires that the employer provide the phone primarily for noncompensatory business purposes and must have substantial business-related reasons for providing the phone. The IRS gave several examples of these reasons, including instances where the employer needed the ability to contact the employee at all times for work-related emergencies. On the other hand, a cell phone provided for morale, good will, or as additional compensation is not be tax-free.

Employer-provided reimbursements

In a separate memo to its field examination operations, officials from the IRS operating divisions issued “audit guidance” to IRS examiners regarding employer reimbursements to employees for the business use of the employee’s personal cell phone. Examiners were instructed to apply the approach of  Notice 2011-72 and not assert that the employer’s reimbursement of expenses incurred after December 31, 2009 was taxable.

Effective date

Notice 2011-72 applies to all tax years after December 31, 2009. While the IRS did not discuss the treatment of cell phones before 2010, it is unlikely the agency is eager to challenge the tax-free treatment of cell phones in the ordinary case.

IR-2011-93, Notice 2011-72, SBSE-04-0911-083

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