Payroll in Practice: 2.3.2025

Question: An employer provides an allowance to employees for business use of personal cell phones. In 2011, the IRS provided guidance to field examiners who audit employer plans involving reimbursement paid to employees for business use of their personal cell phones. The guidance provides criteria for determining whether the reimbursement could be excluded from employee income but only addresses reimbursements received by employees. Is there any IRS guidance that cash allowance arrangements would also be excludible from employee income?

Answer: Until Dec. 31, 2009, cell phones were considered listed property. After that date, cell phones were removed from the definition of listed property under the Small Business Jobs Act of 2010. The listed property rules required that the taxpayer document the amount of the expense, the use of the property, the business purpose of the expense, and the business relationship to the taxpayer using the property.

In the case of cell phones, the employee was to document both business and personal usage, usually by using a log. This was necessary to establish the cost of the business use portion allowable for exclusion from employee wages. The value of any personal use, or undocumented business use, had to be included in employee wages unless the employee reimbursed the employer.

After Dec. 31, 2009, under guidance in Notice 2011-72, the value of the business use of a cell phone provided to an employee for noncompensatory business purposes is treated as a working condition fringe benefit excludible from employee wages and the substantiation requirements that would have to be met to deduct the value from income are deemed to be satisfied. In addition, the value of any personal use of the phone by the employee is deemed a de minimis fringe benefit and is excludible from employee income.

Expense allowances are a common method of covering employee business expenses. IRS Publication 463, Travel, Gift, and Car Expenses, uses the word “allowance” nearly 200 times to refer to meal, per diem, automobile, and depreciation allowances. The publication treats allowances or advances as methods of reimbursement.

For example, under “Reimbursements,” the IRS says: “If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan.”

Later, it states: “A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses. Arrangements include per diem and car allowances.”

Allowance methods, such as per diem, meal, mileage, lease values, and fixed and variable rates are approximations of the actual expense. These methods simplify the reimbursement and recordkeeping processes while satisfying the substantiation requirements of an accountable plan. A phone allowance serves a similar purpose by reducing the need for logs and determining the cost of each call and prorating any fixed cost.

When the guidance for employer-provided cell phones was issued, similar guidance was issued to assist field examiners in audits involving reimbursement arrangements of employers that, as a working condition, required employees to maintain and use personal cell phones for business purposes. The audit guidance recognized that an employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business. Also, the reimbursement must be reasonably calculated so that it does not exceed the expenses the employee actually incurs in maintaining the cell phone.

For example, say an employer requires an employee to have a personal cell phone to communicate with clients outside of the employee’s normal work hours. The employee uses the phone for both business and personal purposes. The employee pays a flat rate for basic coverage providing a certain number of minutes for domestic calls. The employer reimburses the employee for the monthly basic plan expense to enable the employee to maintain contact with business clients throughout the United States during off hours.

In this situation, the entire reimbursement is excludible as a working condition fringe benefit, and the personal use is not a factor. However, if the monthly cost of the phone included charges for items beyond those required to meet the needs of the employer, such as international calling or a Wi-Fi hotspot, the excludible reimbursement would be limited to the basic plan amount. In either case, reimbursement could also take the form of a fixed cash allowance.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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