The IRS recently released Notice 2011-72 to provide guidance on the tax treatment of cellular phones or other similar telecommunications equipment that employers provide to their employees.
For tax years prior to 2010, cell phones were “listed property” as defined by the IRS and thus were subject to additional reporting requirements and tax deduction limitations (see IRC Sec. 274(d)(4)). Although the IRS removed cell phones from the definition of listed property for tax years beginning after December 31, 2009, employers were basically required to report the value of the cell phone in the employee’s W-2 as compensation. The employee could deduct the business portion of the cell phone as an unreimbursed employee expense on Schedule A. Due to these onerous requirements; many employers chose to ignore the requirement to include the cell phone as compensation. Some employers found it easier from a compliance perspective to forego the tax deduction for the cell phones given to their employees.
In any event, nobody was pleased with the tax rules and the IRS responded by publishing Notice 2011-72. The IRS now acknowledges, effective for tax years beginning on or after January 1, 2010, that if an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the IRS will treat the employee’s use of the cell phone as a working condition fringe benefit, the value of which is excludable from the employee’s W-2 as compensation. In addition, any personal usage of the cell phone by the employee need not be included as W-2 compensation.
The IRS notice did state that the issuance of cell phones to employees can still be treated as compensation if the cell phone was not primarily given to the employee for non-compensatory reasons. Examples of non-compensatory usage cited by the IRS included giving cell phones to promote the morale or goodwill of an employee, to attract prospective employees, or as a means to provide additional compensation to an employee where the phone is provided for non-compensatory business purposes. Examples of possible non-compensatory business purposes include the need to contact an employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day. In other words, it is not compensation when the cell phone is given to the employee for the convenience of the employer. If such non-compensatory business purposes exist in your company, put the company’s policy in writing to document it and make the policy effective January 1, 2010.
