Previously I posted the update regarding the change in cell phone classification in regards to the strict documentation procedures that had been required to justify business use of the cell phone. However, despite the relief given, we were still a little in the dark about the position of the IRS in regards to employer provided cell phones and employer reimbursements for the use of personal cell phones.
Recently the IRS issued Notice 2011-72 granting an early Christmas present to all of us. The notice walks through the same analysis as offered in my previous blog, but it goes one step further. In the notice, the IRS stated that if an employer can determine that it has a bona fide business reason for issuing an employee a cell phone and the cell phone is not considered to be compensation for the employee's services, then it will deem that all the documentation standards of IRC Sec. 132 to qualify the benefit as a "working condition" fringe benefit will have been met and any personal use will be deemed to be a "de minimis" fringe benefit.
While the above notice does not address reimbursements to an employee for the use of their personal cell phone, the IRS issued a memorandum to their field examiners on Septemeber 14, 2011 extending similar logic to reimbursements. The example provided in the guidance allowed the tax free reimbursement of an employee's flat rate plan where the employer deemed that there was a business reason for the employee to have a cell phone.
Having documentation "deemed" to be met is the gift from the IRS. Normally, a business would have to maintain documentation to show that the business useage was the predominant use of the phone. With this documentation burden relieved, the employer must only document the business reasons why an employee is required to have the phone. Providing the phone as a part of the employee's compensation package will disqualify this as a tax free benefit. Therefore, I recommend that it not be included in the employee's employment offer as a part of his package.
Since we are now down to one documentation step, I urge you to not skip this step. When documenting the arrangement with the employee, fully state why it is important that an employee have the cell phone. One word of caution, if the reason is so that the employer can communicate with that employee at any time, you could create a wage and hour issue with nonexempt employees. Remember, if you put them on call, you may have to pay them.