Our colleagues at InsidePrivacy recently observed that employers are increasingly giving employees access to work email and apps on their personal devices. In a recent survey, 38 percent of CIOs said that their organizations will stop providing laptops, smartphones, and tablets to workers by 2016. As our colleagues noted, Bring Your Own Device (“BYOD”) policies raise a number of concerns, including how subsidies for employee’s personal devices are taxed.
If structured carefully, a device subsidy may be excluded from the employee’s gross income, even if the employee also uses the device for personal reasons. To be excluded, the reimbursement must be provided solely to pay the actual cost of a device and/or service plan that is needed for a substantial business purpose. The following are key considerations for the analysis:
- Reimbursement vs. Allowance. In general, a reimbursement is eligible for favorable tax treatment (excluded from gross income), but an allowance is not. The reason for this distinction is that an allowance can be used for any purpose. In contrast, a reimbursement is paid only if the employee demonstrates that he or she has purchased the device or service. If the payment is made in advance, it may be excluded from gross income only if the employee must (1) confirm that the payment is actually used for the device and (2) return any unused portion of the payment.
- Substantial Business Purpose. A reimbursement may be excluded from gross income only if the device is needed for a substantial business purpose. Examples of substantial business purposes include a need to be on-call for work-related emergencies and a need to be available to communicate with clients while outside the office. In contrast, a reimbursement designed to promote goodwill or boost morale generally must be included in the employee’s taxable income.
- Reasonable Amount. To be excluded from gross income, the reimbursable amount must be tied to the substantial business purpose. For example, if the employee is a service technician who needs a phone to call customers in a particular geographic area, a reimbursement for international phone coverage probably will not be excludable.
- No Choice for Employee. To be excluded from gross income, a reimbursement must not be a substitute for wages. If an employee has a choice between a device reimbursement and cash, the reimbursement should be included in the employee’s taxable wages.