If you are anything like the vast majority of Americans who rely on their phones for professional communication, news updates, or social interactions, you probably utilized your device for business-related purposes at some point. As with other tools that you use during the regular course of your venture, this would mean that you should be able to deduct a certain portion, if not all, of your phone-related expenses, right? Well, while it depends on a few factors that you must look into, the answer to whether you can deduct your phone bill as a business expense is generally going to be – yes.
Understand How The IRS Views Cell Phones Use In Business
Although the modern-day cellphones are an extremely new offspring of technological advancement, the IRS did not wait too long to address their use when it comes to taxation and deductibility. In 2011, Congress officially declared cell phones eligible for a 100% deduction on your taxes if you meet certain requirements. Expectedly, the IRS published additional guidance that helps taxpayers understand what Congress intended to do with the resolution. The guidance came in the form of Notice 2011-72, which breaks down the Section 2043 of the Small Business Jobs Act of 2010 as well as many other sub-sections that the taxpayers who use their cell phones during business should understand.
In simple terms, given that Congress gave a green light for deducting cell phone use on your taxes, the IRS quickly adjusted their treatment and started viewing these devices as any other that people use for their business. For instance, just like you are allowed to claim a mile-based deduction when you have to use your personal vehicle for work, the IRS does not mind you claiming a deduction when you have to use your personal cell phone for work.
The Blurred Lines for Deducting Phone Bills
And while most people rely on the percentage-of-use deduction for cell phones, the IRS learned back in the early 2010s that this is not the most straight-forward approach. Namely, it is virtually impossible to prove that someone did or did not use their cell phone for a certain percentage of the time. For example, if you decided to claim an 80% deduction on your annual cell phone bill, the IRS would be at a serious disadvantage had they decided to audit you and track down if that figure is accurate.
Instead, the IRS now simply lets taxpayers deduct the entirety of their cell phone bill as long it was primarily used in business. If you also use it for a large number of personal reasons, the deduction will not be permitted. In addition, you have to ensure that the amount you are claiming is not exceeding the average expected in your industry. For example, if you work as an independent contractor who drives for a large ride-share organization like Uber or Lyft, it is well within reason to expect that your cell phone bill will be one of the main expenses in your venture since you have to use it to access the app. If, however, you work as a painter and decide to claim a deduction for your entire annual cell phone expenditure based on a half-dozen, business-related calls you made, the IRS could come to conduct an audit. Hence why understanding the industry in which you operate is crucial to being able to accurately forecast your odds of successfully claiming a cell phone deduction.
What If I Use My Phone for Both Business and Personal Use?
Ideally, the IRS would want you to keep your personal and business assets separate. In reality, however, they recognize that most people are not going to own two cell phones just so they can make it easier on themselves during tax season. This is why millions of Americans still continue to go back to the percentage-of-use deduction that is very similar to the home office deduction.
If you need a cell phone for your business and use it on a consistent basis while also using it outside of work for personal reasons, you will still retain the right to deduct a portion of the expense related to the business use. So, if the phone serves your business needs for half of the time, you will be allowed to claim 50% of your annual phone expenses as a tax deduction on Schedule C. The other half is a personal expense that cannot be claimed on your taxes just like you cannot claim the parts of your home that do not relate to your home office.
What If My Employer Pays for My Phone Bill?
If your employer covers the cost of your cell phone bill, you can consider that to be a so-called “fringe benefit.” The great thing about these is the fact that you do not have to include it in your income since they are not taxable so you will receive a free phone plan that you do not even get taxed on. In the meantime, your employer will also be able to take full advantage of this on their own taxes as they will get to claim the entire deduction as a business expense since they are paying to provide you with a phone plan that helps you fulfill your job-related duties.
As a freelancer, however, you will not have an employer. Nonetheless, simply remember that you will generally be able to claim the entire cell phone plan as long as you used it in the regular course of business and it was necessary for you to conduct your operation. Of course, make sure that your deduction is within the scope of how much other professionals from your industry are charging. To obtain additional advice or tax-planning strategies, consider a free, five-minute consultation or review our FAQ section.