Payroll in Practice: 5.8.2023

Question: Employees receive an allowance toward the business use of their personal mobile phones. Is the allowance taxable income to the employees?

Answer: The allowances may be excluded from employee wages as a working-condition fringe benefit, provided certain requirements are met. The allowances must be granted to employees for noncompensatory business reasons and the amount must be reasonable.

This is a policy decision by the Internal Revenue Service related to the treatment of employer-provided mobile phones. The underlying requirements for exclusion of the benefit from wages are essentially the same. IRS Notice 2011-72 provides that when an employer provides an employee with a mobile phone for noncompensatory business reasons, the employee’s business-related usage is treated as a working condition fringe benefit and is excludable from gross income.

When determining whether the working condition fringe benefit exclusion applies, the substantiation requirements for the exclusion are deemed to be satisfied. A log of business and personal use of the phone is not required, but the business purpose for providing the phone should be documented.

Additionally, the value of any personal use of an employer provided phone that meets the requirements will be treated as excludable from the employee’s gross income as a de minimis fringe benefit.

The notice includes examples of substantial noncompensatory business reasons, such as the employer’s need to contact the employee for work-related emergencies, the employer’s requirement that the employee be available to speak with clients when away from the office, and the employee’s need to speak with clients at times that occur outside at the employee’s normal workday.

However, a mobile phone provided to boost employee morale or promote goodwill, to recruit a potential employee, or as a means of providing added compensation is not considered to be primarily for noncompensatory business purposes.

Notice 2011-72 applies only to employer-provided mobile phones. However, within a few days of issuing the notice, the IRS sent audit guidance to its field agents that extended the exclusion to reimbursement for business use of a personal mobile phone.

The rules are similar to those for an employer-provided phone. If the allowance is provided for noncompensatory business purposes and the amount of the allowance is reasonable, the allowance amount will be treated as reimbursement for the cost of a working condition fringe benefit. The reimbursement can be excluded from employee income, presumably as a reimbursed employee business expense under an accountable plan.

Exclusion from income is an important consideration. Under the Tax Cuts and Jobs Act unreimbursed employee business expenses, previously allowed as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor, are not deductible. If an employee receives an allowance for use of the phone that is treated as taxable income, the employee takes a tax hit. The allowance is additional taxable income, but the employee cannot deduct the expense.

Under an accountable plan, an employer must have documentation that the phone is used or is required to be available for a bona fide business purpose of the employer and the reasonable cost of that availability must be established.

While reasonable cost as a standard does not provide a clear allowable value, the notice discusses the cost of maintaining a mobile phone. Based on this, some argue that the entire basic cost of the phone, excluding features that are not required for business use, could be excluded from income. Others think a proportionate amount, based on some documented average relative business use, may be appropriate.

Apart from federal law, California employers are required to reimburse employees for the reasonable cost of business use of a personal mobile phone, under a 2014 California appeals court ruling (Cochran v. Schwan’s Home Services Inc.).

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, 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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