IRS: Cell Phone Services Provided to Employees Excludible from Income

As a general matter, gross income includes fringe benefits unless they are specifically excluded. One of these exclusions is any fringe benefit that qualifies as a working condition fringe, meaning any property or services provided to an employee to the extent that, if the employee paid for such property or services, the payment would be allowable to the employee as a business deduction. A deduction is allowed for all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business.

Special heightened substantiation rules apply in the case of certain “listed property.” Deductions are not permitted for any listed property unless the taxpayer substantiates the deduction by adequate records or by sufficient evidence, including records adequate to corroborate the amount of the expense, the time and place of the use of the property, the business purpose, and the business relationship to the property. Cell phones were removed from the definition of listed property for tax years beginning after Dec. 31, 2009. As a result, the heightened substantiation requirement no longer applies to cell phones. However, the legislation did not specifically address the extent to which the value of the personal use of an employer-provided cell phone must be included in the employee's gross income, or the potential treatment of the value of an employer-provided cell phone as an excludible working condition fringe benefit. As a result, there has been continuing uncertainty about the proper tax treatment of employer-provided cell phone services. New IRS guidance provides helpful clarification.