How to deduct cell phone expenses in your business?

Does it ever feel like there is no clear boundary between you and your business? If so, you are probably also struggling to see the separation in your expense tracking.

• A good accountant will find all deductible business expenses to reduce your taxes.
• A great accountant will document support for your deductible business expenses so there is less risk that an audit will cause increased taxes.

Expenses that have both a personal and a professional element to them are the trickiest ones. A common example is cell phone expenses. The separation between personal cell phone use and business cell phone use may seem like a gray area to you, but the IRS will want to see a clean separation. You could, but you don’t have to, dive into the details of your phone bill and classify each individual phone call, text message and time spent on the apps that are downloaded on your phone. There is an easier way that is typically just as beneficial.

Based on the outcome of many tax court cases, a business owner that is using one cell phone account for both business and personal purposes can typically deduct 50% of their cell phone expenses on their business tax return. The logic is that an average person’s 24-hour day involves sleeping 8 hours and then the 16 hours that you are awake, are split about 50/50 with 8 hours of working and 8 hours of not-working. If your work schedule is more like 4 hours a day (i.e. part-time) then your deductible portion should be more like 25%.

In the event of an audit, you will want to support the cell phone expense with…
a) A written accounting policy stating that the company pays 50% of cell phone expenses for full-time employees.
b) The actual cell phone bills or receipts that support the detailed costs of the owner’s cell phone.

If your cell phone bill includes other phones such as family members, be sure to calculate the expense that only relates to the employee’s account. If the bill does not show the detailed cost of each cell phone, you may extrapolate. For example, if your cell phone bill is $100 for two phones (you and your spouse), your cell phone cost is 50% of the bill or $50. If you work part-time in your business, your $50 is only 25% deductible or $12.50.

If this is not how you have been tracking your cell phone expenses in your business, we suggest that you start using this method going forward. Check out the visual aid we created below to help you understand how to deduct cell phone expenses. Want us to implement this process for you, let us know. We are here to help!