Smartphones, tablets, ultrabooks – the choices appear limitless as we continue to move through this digital age at a record pace. As the variety of mobile devices available continues to evolve, so do the choices employers must make surrounding the fringe benefit costs associated with these devices.
Employers Decision Can Affect Recruiting and Morale
As the use of mobile devices in the workplace increases, employers are faced with a decision: whether to provide employees with mobile devices or reimburse them for the cost. The impact of this decision can be quite far-reaching, as employers need to consider a number of factors, including, but not limited to:
(a) Size of the workforce;
(b) Impact on the bottom line; and
(c) Impact on workplace morale.
These choices can affect the employer/employee relationship. At a time when information is available at the touch of a button, many workers are aware of the benefits other companies provide their workers. If one company offers certain fringe benefits (e.g., employer-provided mobile devices) but another does not, current employees and potential future employees could be lost. The tax effect of the form chosen to provide these benefits probably also influences employee morale, but it is more difficult to gauge. Employers must consider the bottom-line impact of employer-provided mobile devices, both from an operational and growth perspective. Additionally, if employers determine that workplace productivity will increase at a greater rate than the cost, they may change internal policy and start offering employer-provided mobile devices in the workplace.
The tax consequences to the employer likely will not change materially whether it is a C corporation,
S corporation, partnership, or sole proprietorship. The employer generally is afforded a tax deduction for the costs of providing these devices to its workforce. The tax impact to the employee, however, can be vastly different, depending upon a number of factors.
Generally, fringe benefits are taxable to the employee as wages in the year of receipt. However, there are exceptions that employees, as well as employers, should keep in mind in determining the ultimate tax consequence to the employee. Under a plan where the employer reimburses an employee for the cost of the mobile device, the tax consequences to the employee depend on the type of plan the employer implements. If the employer provides reimbursement under an “accountable plan,” the reimbursement payment will not be included on the employee’s W-2. An arrangement will be considered an accountable plan if it meets the following requirements:
(a) Expenses were paid or incurred while performing services as an employee of the employer.
(b) The employee must adequately account to the employer for these expenses within a reasonable period of time. (The IRS provides a safe-harbor presumption of reasonableness if the substantiation occurs within 60 days after incurring the expense.)
(c) The excess reimbursement or allowance, if any, must be returned by the employee to the employer within a reasonable period of time. (The IRS provides a safe harbor if an employee returns the excess within 120 days.)
If an employer’s plan does not meet the accountable plan definition or qualify for an exception, the plan will be deemed as nonaccountable under Sec. 62(c), resulting in the inclusion of the reimbursement payment as wages on the employee’s W-2. Accordingly, the employee is then liable for taxes on the reimbursement. In an effort to potentially reduce his or her respective tax liability, the employee would file Form 2106, Employee Business Expenses, to claim the expenses as itemized deductions. However, annual unreimbursed employee business expenses must exceed 2% of the employee’s AGI to qualify for a tax deduction. As such, employees could find themselves in a position whereby the reimbursement payment increases taxable income (and thus also increases AGI), yet the offsetting deduction is further limited due to the 2%-of-AGI limitation.
The IRS Reacts
In an effort to alleviate the potential unfairness of mobile device reimbursements under accountable plans receiving different treatment from that of reimbursements under non-accountable plans, the IRS issued Notice 2011-72. Under this notice, effective for tax years beginning after Dec. 31, 2009, the IRS treats employer-provided cellphones as a working condition fringe benefit exempt from inclusion in the employees taxable income. Furthermore, if the qualifications of Notice 2011-72 are met, personal use of the device can also be excluded from taxable income as a de minimis fringe benefit.
To qualify for exclusion under Notice 2011-72, the mobile device must be issued primarily for non-compensatory reasons. In other words, the provision of the mobile device must have a business purpose beyond that of additional compensation to qualify for exclusion from taxable income.
As we continue moving through the digital age at such an advanced pace, the tax ramifications of areas and issues not considered have come to the forefront. In particular, the tax consequences associated with employer reimbursement of employee-incurred mobile device expenses requires special attention, as the tax consequences vary depending upon the employer’s reimbursement policy and plan.
By Stephen J. Ehrenberg, CPA February 28, 2013
Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)
CIRCULAR 230 DISCLOSURE: Pursuant to regulations governing practice before the IRS, any tax advice contained herein is not intended or written to be used and cannot be used by the taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.