Can You Deduct a Cellphone for Business Expenses?
Claiming all of your legitimate business expenses helps reduce the amount of taxes you are required to pay on your business income. However, many small business owners are uncertain about what expenses are deductible. The cost of your cellphone and the amount of your monthly bill is typically a deductible business expense, but you must make sure that these costs meet the guidelines established by the Internal Revenue Service.
The IRS requires business expenses to be “ordinary and necessary.” An ordinary expense is one that is typically found in other businesses comparable to yours. In other words, companies that utilize drop-shippers exclusively would have trouble justifying an expense to rent a warehouse. Cellphones have become so commonplace that you should not have a problem proving it is an ordinary expense. A necessary expense is not the same as an indispensable expense, but it needs to be something that helps you to operate a profitable business. If only your children have your cellphone number and you never make business-related calls from your cell, you might have trouble proving it is necessary.
If you purchased your cellphone, you may be able to deduct the cost in full. Under certain conditions, however, you might have to depreciate or amortize the cost, taking credit for the cost over multiple years. If you purchase a particularly expensive phone with a life expectancy greater than one year, the IRS probably will consider it a capital asset. Capital assets are typically amortized or depreciated.
The cost of your monthly plan is a deductible expense, as are any charges for long distance, overages and similar items. However, the additional charges must be business-related. For example, if you have two charges for directory assistance, one for a personal call and one for a business call, you can deduct only the charge related to your business call. Most companies include cellphone expenses under the category of utilities if they do not have a separate line item for telephone expenses.
Many people have one cellphone that they use for both personal and business reasons. Unless you have a phone that is dedicated to business purposes only, you must prorate the expenses. For example, if 80 percent of your incoming and outgoing calls are of a personal nature, you can only deduct 20 percent of the cost as a business expense. Be sure to include any taxes on your bill when computing the deductible amount, as these taxes are also legitimate business expenses.