A cell phone provided by an employer is generally considered a benefit that the employer can deduct as a necessary expense, provided it is primarily used for business purposes. If its purpose is primarily personal, it is not considered a business expense. A business will not be able to deduct it, and employees must pay tax on it as a benefit.
If you are self-employed, you will need to keep detailed records of when and how your personal phone is used for business expenses in order to deduct it on your taxes.
If you are an employee who uses your personal cell phone for business, it is considered an unreimbursed employee expense. You are not able to deduct these expenses.
Business Use of Personal Cell Phone
If you're self-employed and use your personal cell phone for business, rather than a dedicated landline or business cell phone, you can deduct a portion of the cost of your phone as a business expense. However, this deduction is closely scrutinized by the Internal Revenue Service (IRS).
If 30 percent of your time spent on your cell phone is used for business, you can deduct 30 percent of the cost of your cell phone bill on your taxes. To do so, you will need to prove the amount of time spent. Keep careful records, such as an itemized phone bill, so you can prove your deduction is valid in the case of a tax audit.
If you are an employee whose employer requires you to use your personal cell phone for business calls and emails, this is considered an unreimbursed employee expense. Under the Tax Cuts and Jobs Act, these expenses are no longer deductible except for:
- Armed Forces reservists.
- Qualified performing artists.
- Fee-basis state or local government officials.
- Employees with impairment-related work expenses.
Not all employees who fall into these categories will be able to deduct cell phone expenses. You will need to talk to a tax advisor to see if you qualify for a deduction.
Are Cell Phones Business Expenses or Employee Benefits?
Employer-provided cell phones are considered fringe benefits. This is because most businesses these days require employees who travel or are in management positions to have mobile phones.
The IRS says that an employer-provided mobile phone is a fringe benefit to the employee, and the value of the phone, including both the cost of the phone and the monthly charges for using it, is taxable to the employee unless it can be proven that the phone is used primarily for business purposes.
The IRS also says that "when an employer provides an employee with a cellphone primarily for...business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment."
Can a Business Pay for an Employee Cell Phone?
The IRS calls a mobile phone a working condition fringe benefit. That benefit is defined as "property and services you provide to an employee so that the employee can perform his or her job." As such, it is considered an ordinary and necessary business expense.
As a working condition fringe benefit, occasional employee personal use doesn't affect the ability of the business to deduct business-related mobile phone costs, nor is it taxable to the employee as a fringe benefit.
Essentially, this means that the primary business purpose must be established in order for the business-related expenses to be deductible to the business while avoiding forcing the employee to pay taxes for the use of that phone. The personal use of the cellphone is not deductible as a business expense of the company.
If you require employees to use mobile phones for business purposes, the employee's personal use is treated for tax purposes as a de minimus fringe benefit and is not taxable. The cost of using the phone is still deductible. This IRS provision applies to the use of an employer-provided mobile phone.
What is "ordinary and necessary" is determined by the IRS and applies to mobile phones in specific ways. For example, if an employer requires that the employee must be reachable by phone during non-business hours, that is considered a necessary business use of a cell phone.
On the other hand, the IRS says providing a cell phone for morale or goodwill purposes, to attract a new employee, or as a bonus are not considered "business purposes." In these instances, a cell phone is not excluded from being a taxable fringe benefit.
How Businesses Can Deduct Cell Phone Use
To avoid tax audit issues and comply with the laws regarding business-related cellphone use, discuss the issue with your tax advisor. Some measures business owners may want to put in place include:
- Restricting mobile phones to employees who must have them to properly perform their duties, such as outside sales representatives, managers who travel frequently, and executives.
- Keeping employee phone logs to verify business usage. If this is onerous, find a way to access online cellphone logs through your carrier so you can retrieve them if necessary.
- Requiring that employees with company-provided mobile phones keep another phone for personal use.
Taking cellphones out of the listed property category does not mean you can forget about keeping good records on the personal use of your mobile phone. You still must be able to prove that the phone was used primarily for business purposes.