Bad news for people who think cell phones cause brain cancer, but good news for employers who think IRS’ old substantiation rules on cell phones were causing brain damage and stomach ulcers.
The IRS provided some long-anticipated relief to employers that provide cell phones to their employees for business use, as well as to the employees who once were technically required to keep laborious records or telephone logs of their business and personal calls, the agency said on Sept. 14
“Heightened substantiation requirements that apply to listed property no longer apply to cell phones for taxable years beginning after Dec. 31, 2009,” because cell phones — and similar devices — are no longer listed property under Code Section 274(d), the IRS said in Notice 2011-72.
The Small Business Jobs Act (SBJA) of 2010 (Pub. L. 111-240), enacted Sept. 27 of last year, is responsible for that favorable change. At the time, however, it was unclear whether the IRS would interpret the SBJA as having alleviated the substantiation requirements that went along with handing out cell phones as fringe benefits to employees.
At issue was the fringe benefit deduction employers could take under Code Section 132. Although many employers (including the IRS) seemed to have given up on requiring employees to keep extensive records of their personal use, as cell phones became ubiquitous, the requirement was still present. So was the risk of an IRS penalty.
Today’s announcement makes clear that the IRS regards the SBJA as having alleviated the burdensome recordkeeping requirements in order for employers to take a deduction for the devices under Section 132.
The Notice determines that cell phones are nontaxable based on a two-step approach:
- Business use — cell phones provided primarily for noncompensatory business purposes are deemed to satisfy the otherwise applicable business substantiation requirements for the working condition fringe exclusion.
- Personal use — the corresponding personal use of such a business cell phone is deemed excludable as a de minimis fringe benefit.
That does not mean that cell phones used primarily for personal reasons are now exempt from substantiation requirements. The IRS said in News Release IR-2011-93: “The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.”
The IRS also sent a memo to its examiners instructing them that a similar approach “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 the guidance issued today,” the IRS news release states, “where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements.”