I have a terrible confession to make: I never leave the house without my cell phone. Really.
I rely on my cell phone for work-related calls while I’m out of the office as well as email and messaging. I use it to check Twitter and post to Facebook, and occasionally check the web. I can also browse – and post to – the blog from my phone. And you already know that I have the IRS app on my phone (and the Tax Code on my iPod).
That may sound a little bit over the top to my some occasional cell phone users like my mom (who, remarkably, texts) but it’s becoming the norm for many working folks these days. Employers and employees alike rely on cell phones to stay connected: in fact, many employers issue cell phones to their employees to do so.
Until last year, the IRS took the position that employer-issued cell phones were a taxable benefit. Relying on a rule from 1989, employers that hand out cell phones to their employees had to report the value of employer-issued cell phones as they would compensation. The same law required employees to keep detailed records of all calls made on cell phones issued by employers indicating which calls were business and which calls were personal. And in 2009, they made an effort to enforce that law. The results weren’t pretty.
The hue and cry that followed was deafening. The IRS eventually reversed course and proposed more specific rules for the taxation of personal use of cell phones. Subsequently, the IRS solicited taxpayer input on the issue and released Notice 2009–46, Substantiating Business Use of Employer-Provided Cell Phones (downloads as a pdf).
And then the lines fell silent for a bit.
Today, the IRS issued guidance designed to clarify the issue. The IRS now takes the position (based on prior feedback and a provision in the Small Business Jobs Act of 2010) that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee.
And it gets better. As a result, the IRS will not require recordkeeping of business use in order to receive this tax-free treatment (if you’ve seen me wax on about this recordkeeping bit, you’d understand my enthusiasm for this news).
Specific details can be found in Notice 2011-72 (downloads as a pdf).
At the same time, the IRS addressed how to treat cash allowances and reimbursements for work-related use of personally-owned cell phones. Here’s where they come down on the issue: employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable.
There is a catch: the guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related. Outside of the obvious examples of what would be not primarily business related, the IRS specifically singled out the provision of cell phones “to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation” (I’m kind of intrigued that an employer would use a cell phone in an attempt to woo an employee: that would have to be some cell phone). That use remains generally taxable.
So, finally, this issue has been put to bed… until we start to argue over what constitutes “similar telecommunications equipment” (that iPad you’ve been drooling over, perhaps?). Considering that it took about 40 years for the IRS to nail down how to treat cell phones, I’m thinking we have some time.
Rumbak Law, PA also has the story.
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