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Smartphone Confusion - Deciphering the Tax Rules Applicable to Mobile Device Policies
This article has been republished in Bloomberg BNA Tax Planning International Review, December 2012
As mobile communication devices become more of a necessity than a 'nice-to-have' item in the workforce today, a wide array of options, along with new mobile device policies, has emerged. The popular trend has been the 'bring your own device' policy (or BYOD as it is commonly referred to in industry). This trend is depicted in the pie chart comparison below, which shows a 10% increase in just one year in the use of personally-owned devices (instead of company-owned devices) for business applications.
Each mobile device policy presents its own unique set of advantages and disadvantages. It is, therefore, increasingly important that, as a new mobile device policy is proposed, all appropriate business units (eg IT, tax, human resources, etc.) be involved early in the process. The tax implications and income reporting rules vary depending on the type of mobile device policy your company has adopted.
Taxand US focuses primarily on the tax implications and income reporting rules of various mobile device policies, but also addresses how each policy affects the company from a non-tax perspective (eg enterprise data security concerns).
Four common types of mobile device policies adopted by companies today include:
- Stipend - employer provides fixed dollar amount
- Employer all-inclusive - employer provides mobile device and service plan
- Reimbursement - employer reimburses employee for actual mobile device and service plan expenses
- BYOD - employee provides personal mobile device and employer provides service plan
Prior to 2010, if an employer provided an employee with a mobile device (or 'other similar telecommunications equipment'), it was considered listed property (subject to special heightened substantiation rules) and treated as a fringe benefit. The entire value of the mobile device benefit was included in the employee's wages, unless it was explicitly excluded from gross taxable income by another section of the Internal Revenue Code (i.e., a working-condition fringe benefit). Likewise, personal use of the employer-provided mobile device constituted a fringe benefit, and was to be included in an employee's wages.
The Small Business Jobs Act of 2010 removed mobile devices from the definition of listed property (thus not subjecting mobile devices and service plans to the heightened substantiation rules) for taxable years beginning after December 31, 2009. The Act did not alter the treatment of employer-provided mobile devices as a taxable fringe benefit, the value of which was required to be included in an employee's wages.
IRS (Inland Revenue Service) Notice 2011-72 altered the IRS position on the treatment of mobile devices as a fringe benefit. The notice mandated that after December 31, 2009, the IRS was to treat an employee's use of an employer-provided mobile device for business purposes as a working-condition fringe benefit, the value of which is excludable from an employee's wages. Additionally, any personal use of the employer-provided mobile device constitutes a de minimis fringe benefit, which is also excludable from an employee's wages.
According to this notice, an employer can be said to have provided an employee with a mobile device for non-compensatory business purposes if there are several significant reasons related to the business that require the employee to obtain a mobile device ---- for example, the need to contact the employee at all times for work-related emergencies, the employer's requirement that the employee be available to speak with clients at times outside the employee's normal work schedule, etc.
There are a few situations when the relief provided in Notice 2011-72 (allowing the value of business and personal use of an employer-provided mobile device to be excluded from an employee's wages) may not apply. For example, providing an employee with a service plan that contains excessive features (such as international calling features when the employee's clients and business contacts are located domestically) could be a problem. Providing an employee with a newly released mobile device to increase morale or to attract a prospective employee during the recruitment process could also be problematic.
What about the treatment of Employee-Owned Devices?
While Notice 2011-72 made it clear that employer-owned devices and service plans (provided for business purposes) could be excluded from an employee's wages (for both business and personal use), the notice was silent regarding employee-owned devices. This caused much confusion from a tax and income reporting perspective, for companies that were allowing their employees to bring and utilise their own device(s). Subsequent to the issuance of Notice 2011-72, the IRS released a memorandum that provided field examiners with instructions on how to treat reimbursements to employees for the business use of employee-owned mobile devices. The memorandum instructs examiners to analyse reimbursements to employees for business and personal use in a similar manner as described in Notice 2011-72.
If employees receive a reimbursement from their employer pursuant to a mobile device policy, three requirements must be satisfied for the reimbursement to be excluded from the employees' wages. Employees must:
- Demonstrate to the employer that the mobile device and service plan have a required business connection.
- Substantiate the expense to the employer (eg produce an expense report with accompanying receipts).
- Return any reimbursement received in excess of the substantiated amount. Collectively, these requirements are referred to as the 'Accountable Plan Rules'.
Determining the mobile device policy your company uses
Because mobile device policies have evolved along with mobile device technology, it is crucial that your tax department be aware of the type of policy (or policies) your company has adopted (or may be considering adopting). Many companies have multiple policies in force at any given time as contracts expire and renew. Additionally, it is not uncommon for a company to have a combination (or hybrid) of mobile device policies, further compounding the complexity of the identification, taxation and income-reporting requirements.
After analysing the details of each mobile device policy combination mentioned above, you are probably asking yourself, "Which policy is ultimately the best for my company and situation?"
The answer is that it depends, and selecting one or two of the options mentioned above to tailor in order to balance the company's needs and requirements with the employees' preferences (for a potential productivity boost), is often preferable.
The most appropriate mobile device policy is subject to the benefits that your company wishes to maximise, and which costs it aims to minimise. Although the IRS has clarified the tax treatment of mobile device policies, the critical element lies in correctly identifying which type of mobile device policy (or policies) your company has adopted.
The use of a stipend as a means to provide mobile devices to employees for business purposes is generally the least tax-effective policy (for both the employer and employee), because the employer is required to treat the stipend as additional wages to the employee, which are subject to income tax and employment tax withholding requirements. The other policy options allow the employer to exclude the benefits from the employee's wages as a working-condition fringe benefit, eliminating the income tax and employment tax withholding requirements.
Ultimately, it is imperative that you and your company understand the tax ramifications these new mobile device and service plan policy variations have on the firm. As IT departments continue to update policies and roll out new mobile devices, correctly reporting income to employees becomes increasingly more difficult for companies. With tax and income reporting updates, continual technological advances in mobile devices and the increased complexity of adopting multiple variations of mobile device policies, it is important to have top-notch communication between employees, the tax department, and the IT department.
Your Taxand contact for further queries is:
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