Do you provide your employees with cell phones or pay their cell phone bills? Well then you will be interested in this news, as this week the Internal Revenue Service (IRS) issued guidance on how a business should be treating employer-provided cell phones. As you know, providing something of value to an employee is going to be taxable to the employee and deductible by the business. The exception to this situation is when a business provides an employee with a tax-free fringe benefit. How does a benefit get to be “tax-free” is summarized as follows: Congress says so. Congress hasn’t said cell phones are a tax-free fringe benefit so they are taxable to the employee at the fair market value of the employer gift or payments.
But, now, with the new guidance from the IRS, the situation is a little better. For instance, the cell phone you gave to your employee may be exempt from tax for the employee if you gave it to the employee for “noncompensatory business reasons.” An example of this would be if you gave your employee the cell phone so they could talk to clients when they are away from the office. The IRS guidance specifically says that if the cell phone is provided to promote employee morale or goodwill then it is not provided for noncompensatory business reasons and the value of the phone is taxable income to the employee.
If you can get over the “noncompensatory business reasons” for giving the employee a cell phone then the IRS will treat the employee’s use of the cell phone as related to the employer’s business and thus as a working condition tax-free fringe benefit. That means that the payment of the cell phone bill is also not subject to tax to the employee. And one more benefit of clearing this hurdle, is that the IRS will treat any personal use of such a cell phone as a de minimis fringe benefit, excludible from the employee’s income.
This guidance is effective as of December 31, 2009 and thereafter. (Notice 2011-72)
Jeremiah K. Murphy, CPA is an accounting firm providing tax services, audits and business consulting