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It’s no secret that how you run your company—as a proprietorship, an LLC, or a corporation—affects your tax deductions. In many cases, corporations get the biggest advantages, and that is the case with business cell phone expenses. This article will give you advice for getting the most out of your corporate advantage on cell phone deductions, as well as the requirements for other business owners.
History of Cell Phone Deductions
Did your corporation pay for, or reimburse you for, a business-purpose phone? If so, your corporation gets to deduct both the cell phone’s cost and its usage charges. Does that sound like a good deal? Well, it is—because sole proprietors and single-owner LLCs do not have this advantage! (Keep in mind, however, that partnerships and LLCs run as partnerships are eligible for the same deductions as corporations in this scenario.)
Why are corporations the only entities to cash in on this situation? It goes back to the listed property rules. These tax rules were applied to cell phones all the way back in 1989, and although listed property creates several hoops for taxpayers to jump through, the one that applied to cell phones was the requirement to log both business and personal use. You may be familiar with this requirement in the form of your business vehicle’s mileage log.
But, that’s just where the situation started. In 2010, cell phones were removed from the listed property category. Legislators realized that they simply do not fit in this group. The removal was accomplished through the Small Business Jobs Acts[1].
Corporate Advantage
So, why are some small business owners still getting the shaft? First off, the newer act did not address how to tax personal cell phone use. Then, in 2011, the IRS laid down cell phone guidelines. And, they address cell phone use for employees. As the owner of a corporation, you are considered an owner-employee because your corporation is a fully separate entity from you—not so for the owner of a proprietorship or LLC.
Here’s what the IRS decided[2]:
- No records need to be kept regarding personal vs. business use of employees’ cell phones, and employer-provided cell phones will not be taxed for personal use.
- To qualify for this tax advantage, the reason for providing an employee with a cell phone must be mainly for “noncompensatory business purposes”. That means one of the following (or a similar situation) must apply:
- The phone allows the employer to contact the employee regarding work-related emergencies at any time;
- The employee is required to speak with clients when away from the office; or
- The employee is required to talk to clients in other time zones, which may fall outside regular workday hours.
For a corporate owner-employee, it should be fairly easy to meet at least one of those requirements. In fact, your company doesn’t even need to purchase a cell phone for you. You can use your personal cell phone and have the corporation reimburse you or provide a cash allowance for phone usage[3]. That means no logging usage for you (or your corporation), and you still get the deduction! That’s right. As long as you pay a fixed monthly fee (not pay as you go), then your corporation can reimburse you for the entire amount—even if you use the phone for personal calls, too.
What about Other Business Owners?
Because of the differences in business structure, sole proprietors and LLC owners are not considered owner-employees. That means these hassle-free tax breaks apply to your employees and not to you. However, you can still deduct your monthly business-related cell phone costs. You’ll just have to calculate the amount for personal use. Your business-related cell phone use will be deducted like any other business expense, and you depreciate your cell phone’s cost.
Basically, you still benefit from cell phones no longer counting as listed property, but you do have to log usage. So, if you tally up the usage hours for the year, and 80 percent of those were business-related hours, then you can monthly fee and depreciation deductions are for 80 percent of the total.
Important: You will need to document those calls to prove the 80 percent business use. But, don’t droop your head! You can do this easily by simply taking a pen to your phone bill and marking which calls were business and which were personal[4]. Here’s another bit of good news: you don’t need to pour over every phone bill for the entire year. The IRS allows you to take a sample, three months for instance, and apply it to the year if you make about the same number of business calls each month[5]. Or, just save yourself some time and get two phone numbers for your cell.
For employees: Be aware that cell phones given as an incentive or morale booster are counted as taxable income[6].
A Note on Independent Contractors
If you are an independent contractor, you get tax-free, tax-favored employee status for your cell phone, as long as your cell phone is reimbursed by or given to you by an employer. That employer can be a broker, customer, client, etc.[7] In all other circumstances (your phone usage is not reimbursed), you are considered a proprietorship and must prove your usage for deductions.
With all its distinctions for various groups and categories, tax laws will always end up providing an advantage to one group or another. In the case of cell phones (and many other fringe benefits) corporations and their owner-employees get the edge on tax deductions. Whatever type of company you run, make sure you know the rules so you can get the most from your tax return.
- P.L. 111-240: IRC Section 2043. ↑
- IRS Notice 2011-72; See also IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (for use in 2012; updated Dec. 7, 2011), p. 12. ↑
- IRS Memorandum for All Field Examination Operations, Sept. 14, 2011. ↑
- Umit Tarakci, T.C. Memo. 2000-358. ↑
- Reg. Section 1.274-5T(c)(3)(ii)(C), Example 1. ↑
- IRS Notice 2011-72; see also IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (for use in 2012; updated Dec. 7, 2011), p. 12. ↑
- IRS Regulation 1.132-1(b)(2)(iv). ↑