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How to claim a cell phone tax deduction (and save a lot of money)

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Updated on:
December 12, 2022
December 12, 2022
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Mobile communication is increasingly becoming an important aspect of everyday business operations. Wireless and mobile platforms help all employees -- from desk-bound workers to the mobile workforce -- remain in constant communication, ensuring that none of them is out of the loop.

However, as much as mobile communication drives business, the monthly cell phone bill can add up to obscene amounts. The same goes for internet service, software, and all other sophisticated gadgets that enable smooth mobile communication.

So, when the opportunity to claim a cell phone bill tax deduction presents itself, grab it. With cell phones, laptops, iPads, and the Internet gradually becoming necessary equipment for running businesses, the Internal Revenue Services now makes it possible for you to deduct the cost of some of these items used for business (in fact, we recommend you use an organizer for tax receipts to do everything for you). Be aware, though, that the IRS’s standard for a legitimate deduction is that the item is a usual, necessary, customary, and reasonable expense for your type of work.

Who can claim a cell phone business expense?

Independent contractors, compared to the traditional W-2 employees, have more tax deductions available to them. This is because they can deduct business expenses that were incurred and not reimbursed and a cell phone bill is one of those expenses.

They--the business owners, self-employed workers, and contractors who use cell phones entirely for business-- can write off the entire cost of equipment and service charges as a business expense.

What about employer-provided mobile phones?

For employees whom the employer provides cell phones for business use, their use of the cell phone, both for their business and personal use, is a non-taxable fringe benefit. More importantly, you will not need to keep records of business purposes to receive this tax-free treatment.

The IRS clearly states that an employer-provided mobile phone is a fringe benefit to the employee, and its value, including both the monthly charges for using it and its initial cost, is taxable to the employee. This is unless it can be proven that the phone is used primarily for business purposes.

Tax-free treatment

This tax-free treatment is only available if the employer provides the phone for non-compensatory business purposes i.e. you have substantial business reasons for providing the employee with a cell phone. Some of the reasons for providing a cell phone to an employee include:

  • You have to be in contact with the employee at all times for work-related emergencies;
  • As part of his/her job function, the employee must contact clients or customers when the employee is away from the office.
  • The employee is required to stay in contact with other employees outside of the employee's normal working hours;
  • The employee needs to speak with clients located in other time zones at times outside of the employee's normal workday.

You should note that if the cell phone is provided to the employee to promote morale or goodwill, or as a means of furnishing additional compensation to the employee, and it is basically not provided primarily for non-compensatory business purposes, then, in this case, the value of the cell phone should be included in the employee's income as a taxable fringe benefit.

Exceptions Under The New Tax Cuts & Jobs Act

If your employer requires an employee to use their personal cell phone for business calls and emails, it is considered an unreimbursed employee expense. And, under the new Tax Cuts and Jobs Act, these expenses are no longer deductible except for:

  • Armed Forces reservists.
  • Qualified performing artists.
  • Fee-basis local or state government officials.
  • Employees with impairment-related work expenses.

However, not all employees in this category can deduct their cell phones. Find out if you qualify for this business expense from a reliable tax advisor.

What is the reimbursement policy for phone use?

As most small businesses cannot afford, and therefore do not provide a cell phone to their employees, more often than not, a small business owner will provide reimbursement or a cash allowance for the employees' work-related use of their personal cell phone.

The IRS in turn recognizes this administrative approach and considers the reimbursements of the employees' expenses for reasonable cell phone coverage to be non-taxable.

Big companies on the other hand come up with elaborate reimbursement policies that ensure that they comply with their existing expense policies.

The company’s cell phone policy plays a role in creating a reimbursement policy. The company may adopt one or a combination of these cell phone policies to see which works best for them.

The policies are:

Company Owned, Personally Operated (COPE) policy

In this plan, the company is responsible for purchasing both the cell phone and the service plan for the employee. It is considered a working fringe benefit if the phone is used for business and for personal use, it comes under the de minimis fringe benefit.

Bring your own device (BYOD) policy

In this policy, the employee has their own mobile phone that they use for business as well. The expense is not included in their Form W-2 if they buy the device themselves. They can, however, take an itemized deduction, which is limited to 2 percent of their adjusted gross income, on their income tax.

The Stipend policy

Falling under the non-accountable plan, this policy requires the employer to provide a monthly allowance to the employee to buy a phone and a service plan. The employer must record the allowance in W-2. The employer can then consider it for employment tax withholding and income tax.

Expense reimbursement policy

In this policy, the employee is allowed to purchase a mobile device along with the service plan from a list of company-approved devices. The company will then reimburse the initial cost of the cellphone and subsequent service plan fees every month after receiving the associate receipts of course.

The choice of policy is influenced by various factors such as ease of use, cost of acquisition and service plan, etc. As such only one policy may not work best with their existing expense policies stipulations.

The requirements for deducting a phone bill

Business owners qualify for a cell phone tax deduction from charges that they incur when they use the mobile phone exclusively for business-related purposes. If you use a personal cellphone for business, then the regular monthly expense does not qualify as a full deduction. For you to deduct it as a business expense, you will have to calculate the business-use percentage of the mobile phone on a month-by-month basis.

To avoid even more complications, try not to use your cellphone as your primary residential phone. Having a separate phone for work and another for home is even better. As stated above, in most cases, cellphones are only partially deductible because of personal use. But if you have a separate phone bill and cellphone plan for business only, then you can claim a 100 percent deduction.

How to claim work-related phone calls

Ideally, the IRS does not have an exact rule that applies to how to calculate your business use, so use your best judgment. For example, if you use your personal mobile phone for business as well, you can only claim the portion of your phone use that is work-related. You’ll have to calculate the business use percentage and then multiply that by your actual cell phone expense. You also need to prove usage by keeping records of those costs.

So, if you use your cell phone for business, the regular monthly expense does not qualify as a deduction. To deduct this expense, you must calculate the business-use percentage of the mobile phone on a month-by-month basis.

You will need:

  • Notes that indicate whether each call was for personal use or business
  • The business purpose of each call
  • Charges for business-related long-distance calls
  • Roaming charges related to those business calls
  • Additional services added specifically due to business needs
  • Plan increases specifically due to business needs

Having an itemized monthly statement makes it easier for you to look back at the minutes and numbers called for business-related purposes. And if you don’t have the itemized statement, don’t fret, you are allowed to make an estimate of your business expenses. A reasonable one at that.

If you are looking for an easy way to track cell phone tax deductions, try Bonsai's expense tracker for self-employed workers. We automatically scan your bank and credit card receipts, organize your write-offs and help you maximize your tax deductions.

The IRS forms required for the deduction

Numerous IRS forms are used for different deductions. This could be a little confusing especially if your work situation has recently changed. If you find yourself in such a situation, the best course of action is to work with a professional CPA to help you out.

But, if you want to go at it solo, there are two distinct forms that you must fill out. They are :

  • For an individual, use IRS Form 1040 and Schedule A for itemized deductions or. write-offs.
  • For the self-employed, independent contractor, or freelancer, use IRS Form 1040 and Schedule C form or Schedule C-EZ for business income and expenses.

Final thoughts

When thinking of deductions you can make, don't forget your cell phone bill expenses and internet service. Deducting these phone expenses along with other 1099 tax deductions can help offset income from self-employment, freelancing, and other side gigs. Be sure to follow the rules on this particular deduction so that you can avoid scrutiny from the IRS.

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