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IRS Clarifies Tax Treatment of Cell Phones

September 22, 2011

On September 14, the IRS issued Notice 2011-72 with guidance on the tax treatment of employer-provided cell phones. The notice explains that generally, if a cell phone is provided to an employee for “noncompensatory” business purposes (the cell phone is not considered part of the employee’s compensation, but intended to facilitate work outside the office or office hours), both the business and personal use of the phone will be nontaxable and no substantiation will be required. The guidance applies retroactively to any use of an employer-provided cell phone occurring after December 31, 2009. 

Reimbursements to Employees for Business Use of Personal Phones. Concurrent with the publication of the notice, the IRS issued a memorandum to its field examiners with guidance related to employers that reimburse their employees for the business use of an employee's personal cell phone. The memo applies a similar tax treatment to such reimbursements. The IRS has acknowledged that, for purposes of the guidance, the definition of “cell phone” includes smart phones. 

Allowances Delivered via Payroll. IRS officials have further clarified that employers may provide employees with cell phone allowances via payroll. If institutions wish to pay a tax-free allowance in this manner, a notation must identify the nontaxed amounts, in accordance with Treasury Reg 1.62-2(d)(1). 

For institutions providing the allowance via payroll, the next step is to determine a method of substantiation related to receipt of the benefit that makes sense for the institution. Officials at IRS would not comment on what might constitute the appropriate level of substantiation, noting that the Service would take a “facts-and-circumstances” approach. 

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
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