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IRS ‘calls out’ tax rules for cellphone use

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in Small Business Tax,Small Business Tax Deduction Strategies

The IRS has issued guidance and a new memo that together clarify the tax treatment of cellphones provided by employers and cellphone reimbursements by employers to employees who use their own cellphones for business.

Alert: Notice 2011-72 builds on the Small Business Jobs Act of 2010, which removed the cellphones used for business from the dreaded listed property category, effective for tax years beginning after 2009.

In the new guidance, the IRS explains that the value of cellphones provided by an employer to an employee where usage might be both business and personal can be excluded from the employee’s gross income if there are substantial reasons relating to the employer’s business for providing the cellphone.

Note that a cellphone provided as a non­business-related benefit is not considered a tax-free fringe benefit.

Also, in a memorandum issued on Sept. 14, 2011, the IRS provides guidance to auditors regarding the treatment of reimbursements given to employees for the business use of their personal cellphones.

When employers require employees to use their personal cellphones for business use and then reimburse them for the cellphone expenses, IRS examiners should analyze the reimbursement in much the same way as they would analyze the cost of a cellphone provided by the employer, based on the guidance provided in Notice 2011-72.

Avoid IRS scrutiny

IRS examiners have been advised to look out for:

  • Employers that, because of this new guidance, choose to divert a portion of existing salary income to reimbursements for cellphone use, with the presumed goal of providing the employee with tax-free instead of taxable income.
  • Reimbursements for employee personal cellphone use that exceeds the actual cost of the cellphone.
  • Reimbursement for employee personal cellphone use that includes expensive items that are clearly discernible as nonbusiness use, such as international usage when the company has no international business, or purchased apps that do not have a business relationship.
  • Reimbursements that are unusually sporadic in nature, such as a reimbursement of $100 per quarter in quarters 1 through 3, followed by a reimbursement of $500 for quarter 4.

Tip: The guidance relating to cellphone use is effective retroactively to tax years beginning after 2009.

—Adapted from AccountingWEB Inc., www.accounting­web.com.

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