The IRS just put out a notice and a memo (details below) providing guidance for businesses who provide cell phones to workers or reimburse workers for business use of personal cell phones. The effect is to further loosen the once incredibly onerous restrictions on deducting cell phone usage. (See my earlier post on the topic.) Not long ago, workers who used a company cell phone for personal calls were expected to document their personal usage and allocate part of the cost of service as income based on personal usage. And workers who were required to use a personal phone for business usage would have to include any company reimbursements as income. Now the personal use of a company phone and reimbursements for a personal phone used for business are all considered tax-free de minimis benefits.
Neither the notice nor memo directly addressed the issue of self-employed individuals who must use their own cell phone for their business. However, the two items do provide a very reasonable basis for deducting the entire cost of a cell phone if it is necessary for operating the business. It’s not guaranteed such a deduction would be allowed–certainly the particular facts of each case would matter–but I’ll feel confident advising many of my self-employed clients to deduct the full cost of their cell phone plans going forward.
IRS Issues Guidance on Tax Treatment of Cell Phones; Provides Small Business Recordkeeping Relief
WASHINGTON — The Internal Revenue Service today 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 Notice issued today provides guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. The Notice provides 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. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.
Simultaneously with the Notice, the IRS announced in a memo to its examiners 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 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. 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.
Under the guidance issued today, 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. 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.
Details are in the memo and in Notice 2011-72, posted today on IRS.gov.