Your Cellphone as Business Deduction

Previously, a cell phone was considered by the IRS to be “listed property,” a special category for deductions. Listed property includes items that the IRS considers to have potential for personal use that might be inadvertently deducted. So it is required to keep records of both business and personal use. The Small Business Jobs Act of 2010, effective for tax years beginning after December 31, 2009, removed cell phones from the definition of listed property under Sec. 280F. Cell phones and similar telecommunications devices used for business are no longer subject to the ultra-strict recordkeeping requirements of Sec. 274(d).. This retroactive change has some taxpayer-friendly consequences. Using cellphones becomes a legitimate, deductible business expense if you must use them for business purpose. The IRS’s standard for a legitimate deduction requires the item to be a usual, necessary, customary and reasonable expense for your type of work. But for most of us, cellphones are also inextricably linked to our personal lives, so it’s a deduction that the IRS scrutinizes very carefully to make sure personal electronics use isn’t being claimed as a business expense.

Your Cellphone as Fringe Benefit

The new law does not does not mean that employers and employees can ignore the personal use of employer-provided cell phones. Employer-provided cell phones are still a fringe benefit and must still meet certain requirements in order to be excludible from income. These requirements are found in Sec. 132. Recently the IRS issued guidance as to whether employer-provided cell phones should be treated as a working condition fringe benefit under IRC Section 132(d). The key point is that the cell phone must be used for business purposes. if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. For example, the employer’s 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 when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day are possible substantial noncompensatory business reasons. A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes
There are two alternatives for excluding cell phones from income under Sec. 132. Specifically, employer-provided cell phones may be excluded either as a working condition fringe (as discussed above) or as a de minimis fringe. A working condition fringe is any property or service provided to an employee to the extent that, if the employee paid for the property or service, the amount the employee paid would be deductible under Sec. 162 or 167. Thus, in order to deduct the cost of the cell phone, the phone must be used for business purposes, and the employee must be able to substantiate this to the employer. This may be difficult to accomplish without requiring the employee to keep detailed records of the business and personal uses of the phone.
The other alternative for excluding cell phones from income is use of the de minimis fringe benefit rules. A de minimis fringe is not included in the employee’s gross income even if it is personal in nature. The term refers to any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable. Thus, it is possible for an employer to argue that the value of the personal use of a cell phone is so small that accounting for it is administratively impracticable or unreasonable. However, the frequency with which the employee uses the employer-provided cell phone for personal reasons may be detrimental to the argument that any personal use is excludible from an employee’s gross income as a de minimis fringe.
In summary, if the cell phone is provided to the employee for noncompensatory business reasons, then it is an excludible fringe benefit. The business can deduct the expense and it is not compensation for the employee. It is now not necessary to track the employee’s business and personal use.

Your Deductions for Employees

If you’re working for someone as an employee, you may also deduct the business use of a cell phone. You will only qualify, however, if your employer requires you to maintain a cell phone for business use. This may include, the employer’s 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 when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day as listed above. Calls you make after normal business hours do not count toward this deduction.
If the business reimburses employees for their personal cell phone, note that per the IRS, “the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone.”
An employee who uses a personal cell phone for his or her employer’s business can now claim the related costs as a miscellaneous itemized deduction without having to prove the phone usage was for the employer’s convenience. The IRS allows you to claim depreciation on your phone as an “unreimbursed business expense” if you use it regularly for your job and your use is a common, accepted business practice..
You can deduct unreimbursed business expenses that amount to more than two percent of your adjusted gross income. These expenses also include professional association dues, legal fees and others listed in IRS Publication 529.

Your cellphone as a small business deduction

You can deduct the total amount of your cell phone bills, including any activation fees, on your tax return as long as the calls were business related. Include calls in which you spoke with customers, employees and co-workers, inquired about supplies and handled business-related disputes. Calls made to talk to potential clients, set up meetings, check your business account balance and learn about new business opportunities count as well. In addition, you can even deduct the money you paid for a new cell phone.
If you’re self-employed and you use your cellphone for business, you can claim the business use of your phone as a tax deduction. Even there are no longer requirements to keep detailed usage records to prove that a cell phone is used for business. However, if the individual has only one cell phone used for both personal and business purposes, some recordkeeping will still be necessary to determine allowable business deductions.  You won’t be restricted from deducting cell phone expenses on your tax return as long as it is primarily used for business. For example, if you can prove that you carry a personal cellphone during business hours and make your personal calls occasionally, the IRS may decide the business phone is purely for business, in which case it won’t affect your income.
However, if you cannot prove that you carry a personal cellphone primarily for business purpose, you’ll have to deduct the portion of your cell phone expenses that are tied to your business. For example, if your cell phone is used for your business 60 percent of the time, you can deduct 60 percent of your expenses. The 40 percent you spend communicating with friends and family is not deductible.

Your Cellphone Depreciation

The Small Business Jobs Act of 2010 changes the way you calculate cellphone depreciation, Under the old rules, cell phones were treated as listed property. if business use was 50% or below in the first year that the phone was placed in service, depreciation had to be taken on a straight-line basis, with the phone assigned a useful life of ten years in accordance with MACRS alternative depreciation system (ADS). Also, no bonus depreciation or Internal Revenue Code (IRC) Section 179 expensing was permitted. If a cell phone was used for business purposes greater than 50% in the first year of service, but business use fell to below 50% in a subsequent year, any bonus depreciation or IRC Section 179 deduction previously taken had to be recaptured in the year that business use declined below 50%.

Under the new rules, cell phones are no longer classified as listed property. Cell phones used less than 50% for business in the year placed in service may be depreciated using a 7-year useful life and a 200% declining balance method under the MACRS General Depreciation System (GDS). The rules regarding IRC Section 179 deductions, however, apply to listed and nonlisted property alike. Therefore, under the new law, cell phones still must be used for business purposes greater than 50% in the year placed in service in order to take an IRC Section 179 deduction. Also, if business use is greater than 50% in the year placed in service but falls below 50% in subsequent years, any IRC Section 179 deduction must be recaptured.

Audit Proof

In the event of an audit, your cell phone expenses may be scrutinized. In such a case, you will need to show that your expense deductions were legitimate. Maintain copies of your cell phone bills and keep receipts for new cell phones, cell phone accessories, batteries and chargers as well. In addition, keeping an itemized call list may help you prove exactly who you called, for how long you spoke and how much it cost you. After looking at a few months’ statements, you should be able to estimate how much of your cell phone gabbing is attributed to business.

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