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IRS Issues Guidance Regarding Tax-Free Treatment of Employer-Provided Cell Phones

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Lauren B. Dunn
Foster Swift Employment, Labor & Benefits Quarterly
Winter 2011

The IRS recently issued guidance that addresses the tax-free treatment of employer-provided cell phones. Effective as of January 1, 2010, IRS Notice 2011-72 eliminates any tax recordkeeping requirements for the business and personal use of employer-provided cell phones and other telecommunications equipment. This favorable tax treatment is available only if the employer can demonstrate that the cell phone or other telecommunications device is provided to an employee primarily for "noncompensatory business reasons."

An employer will be considered to have provided an employee with a cell phone for "noncompensatory business reasons" if the cell phone is provided for reasons that substantially relate to the employer’s business. Noncompensatory business purposes include the (i) employer’s need to contact the employee at all times for work-related emergencies, (ii) employer’s requirement that the employee be available to speak with clients during times when the employee is away from the office, and (iii) employee’s need to speak with clients who are located in other time zones that fall outside of the employee’s normal work day.

An employer that satisfies the "noncompensatory business reasons" standard for an employer-provided cell phone is deemed to have satisfied any tax recordkeeping requirements. As a result, the value of a cell phone (and the related calling/data plan) that is provided by an employer to an employee is excludable from that employee’s gross income as a working condition fringe benefit. In addition, the employee’s personal use of the employer-provided cell phone is excludable from that employee’s gross income as a de minimis fringe benefit. The tax reporting requirements continue to apply in situations where an employee is provided with a cell phone for non-business reasons (for example, to provide an employee with additional compensation, to promote the good will or morale of an employee, or to attract a potential employee).

Please contact your Foster Swift employee benefits professional if you have any questions.