IRS Clarifies Employer’s Provision of or Reimbursement of Employees for Cell Phones Following Removal of Phones from Listed Property Category

In Notice 2011-72 and SBSE Memorandum SBSE-04-0911-083 the IRS gave guidance on how to handle cellular telephones provided to employees or payments to reimburse employees for business use of their personal cellular telephone.  The Small Business Jobs Act of 2010 removed cellular phones from items treated as “listed property” which imposed detailed specific recordkeeping requirements to claim a business deduction.  The changes were effective for taxable years beginning after December 31, 2009.

In the Notice, the IRS indicated that if the employer can demonstrate a legitimate, non-compensatory business reason for the employee to have the telephone, the IRS would treat the provision of the phone as a working condition fringe under IRC §132(d).  The IRS also ruled that in such a case any personal use of the phone by the employee would be deemed to be a deminimus nontaxable fringe benefit under §132(a)(4).

The memorandum issued to IRS agents to clarify the application of these rules described that similar tests would be used for purposes of treating a reimbursement to the employee as being paid under an accountable plan.  The memorandum goes on to give examples of what would and would not be legitimate non-compensatory business reasons for the employee to be provided a phone or be reimbursed for business use of the phone.

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