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On September 14, 2011, the Internal Revenue Service (“IRS”) issued Notice 2011-72, providing long awaited guidance on the tax treatment of employer provided cell phones.
As part of the Small Business Jobs Act of 2010, signed into law by President Obama on September 27, 2010, cellular telephones and other similar telecommunications equipment were no longer classified as "listed property" for deduction and depreciation purposes effective for tax years beginning after December 31, 2009.
Due to this change in the law, detailed records no longer had to be kept segregating business and personal use of an employer provided cell phone in order to claim a tax deduction. However, the Small Business Jobs Act of 2010 did not clarify whether business use of an employer provided cell phone should be treated as a working condition fringe benefit, or if personal use of an employer provided cell phone should be treated as a de minimis fringe benefit. In a prior Insight, Schneider Downs recommended that employers either include personal use of an employer provided cell phone in an employee’s gross income or charge the employee for personal cell phone use on a regular periodic basis. This is no longer necessary.
Notice 2011-72 provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the employee’s use of the cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s gross income. Also, the substantiation requirements necessary for working condition fringe benefits will be deemed to be satisfied. In addition, the IRS will treat the value of any “personal use” of a cell phone provided by the employer primarily for noncompensatory business purposes as excludable from the employee’s income as a de minimis fringe benefit. The rules of this notice apply to any use of an employer-provided cell phone occurring after December 31, 2009.
An employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. For example, the employer’s need to contact the 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 are possible substantial noncompensatory business reasons. A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.
For more information on Notice 2011-72, please contact your Schneider Downs representative.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.
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