Businesses of all types and sizes find cellphones essential. Mobile phones can represent a significant expense for a sole proprietor or a self-employed freelancer, however. Fortunately, if you keep good records of how the device is used in your business, you may claim some or all of your cellphone bill as a business expense.
General Rules on Deductions
The IRS allows individuals and businesses to deduct cellphone services, as long as the expense is related to the production of taxable income. If the phone is used exclusively for business, then 100 percent of the cost of a cellphone can be deducted from income. If there is both business and personal use, then the amount claimed must be proportional to the percentage of business use. If you use a phone half the time for business, you may only claim half of the total expense.
The cost of the cellphone itself is a capital expense that at one time had to be depreciated over a period of 10 years. A change in the tax law, however, now allows businesses to deduct the entire purchase price of the cellphone by using the Section 179 rule in the year of purchase. The cellphone must be new, however. Alternatively, a business may still use traditional "straight-line" depreciation over a period of seven years, although the phone itself may not last that long.
Unreimbursed Employee Expenses
If an employee pays the cost of a business phone, and does not receive any reimbursement from the employer, he can enter the business-related cost of the phone as an unreimbursed employee expense on Schedule A, the form used for itemized deductions on the individual return. The IRS allows individuals to deduct the amount of unreimbursed employee expenses that exceed 2 percent of adjusted gross income. Keeping good records of phone charges is advisable in case an IRS examiner decides to question the deduction.
Fringe Benefit Rules
When an employer provides a cellphone to an employee free of charge to use as the employee wishes, then the employee may be receiving what the IRS considers a fringe benefit. If the employee uses the phone for personal calls, or during non-business hours for non-business purposes, the IRS may require the employee to include the cost of the phone in taxable income. To avoid this scenario, the employee would have to keep the work exclusively phone for work, and use another phone for personal calls.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.