IRS Issues Guidance on Tax Treatment of Cell Phones; Provides Small Business Recordkeeping Relief


The Internal Revenue Service has recently issued guidance designed to clarify the tax treatment of employer-provided cell phones. The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last fall that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

The recently issued guidance provides that, for tax years after December 31, 2009, the IRS will treat the employee’s use of an employer-provided cell phone as a working condition fringe benefit, the value of which is excludable from the employee’s income. However, the cell phone must be issued primarily for non-compensatory business reasons. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

The IRS has also announced a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for non-compensatory 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. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages. The IRS will not require burdensome recordkeeping to receive this tax-free treatment. However, the tax-free treatment does not apply to cell phone use that is not primarily business related, as such arrangements are generally taxable.

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