Cell phones are an integral part of work communication, especially if employees travel on a regular basis. Businesses can reimburse and deduct the full cost of cell phone expenses if the employee uses the cell phone exclusively for business purposes. Otherwise, only a portion of the expense is tax deductible.
Business-Only Cell Phones
If employees need to the ability to make frequent business calls and are out of the office on a regular basis, a business many choose to simply buy business phones and plans. As long as the phone is exclusively used for business, the entire cost of the phone, monthly plan, overage fees and early termination fees are tax-deductible. Save copies of contracts, monthly bills and related receipts to substantiate the expense in case of an IRS audit.
If an employee makes some work calls and some personal calls on the same phone, you cannot claim the entire cost as a tax deduction. Instead, the IRS instructs the taxpayer to calculate how much time is spent for business use and prorate the expense. For example, if 50 percent of calls made each month are work-related, the business can reimburse and deduct 50 percent of all cellphone-related expenses. The best way to substantiate this expense is to get an itemized copy of the phone bill and mark off calls made for business purposes.
Deducting the Expense
Businesses can deduct employee cell phone expenses on the main form of the business tax return. S corps use Form 1120S, C corporations use Form 1120, partnerships use Form 1065, and sole proprietors use Schedule C. There's not a specific line item for cell phone expenses, so include the total in the "other deductions" line. Attach a statement detailing the breakdown of expenses included in other deductions.
Not every business chooses to reimburse employees for cell phone expenses. Individuals can deduct employee cell phone expenses that were partially reimbursed or weren't reimbursed at all on their personal tax returns. To deduct these expenses, the employee must enter all cell phone expenses in line 4 of Form 2106. If the employee receives any reimbursements from the employer, that figure must be entered in line 7.
To claim this deduction, the employee must itemize deductions instead of claiming the standard deduction. The employee will only receive a deduction for employee business expenses that exceed 2 percent of his adjusted gross income.
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