Can I Write Off A New Cell Phone Purchase in 2020? Decoding the IRS Rules
Buying a new cell phone can be a significant expense, especially with the latest models boasting premium features. If you’re a small business owner or self-employed individual, you might be wondering: can I write off a new cell phone purchase in 2020? The short answer is: potentially, yes. However, the process isn’t as simple as just claiming the cost on your taxes. This article will break down everything you need to know to navigate the Internal Revenue Service (IRS) regulations and determine if you can deduct your cell phone expenses.
Decoding the IRS: Business Use is Key
The core principle behind writing off a cell phone, or any business expense for that matter, is business use. The IRS allows you to deduct expenses that are “ordinary and necessary” for your trade or business. This means the expense must be common and accepted in your industry, and it must be helpful and appropriate for your business. Your cell phone qualifies if it’s used to conduct business.
What Qualifies as Business Use?
Business use can encompass a wide range of activities. Examples include:
- Communicating with clients or customers: This could involve making calls, sending emails, or texting.
- Coordinating with employees or contractors: Discussing project updates, scheduling meetings, or sending important documents.
- Accessing business-related apps and software: Checking emails, managing social media, or using project management tools.
- Conducting research: Gathering information related to your industry or specific business tasks.
- Marketing and advertising: Using your phone to respond to customer inquiries, posting on social media, or running ads.
Determining the Percentage of Business Use: The Crucial Calculation
The IRS doesn’t allow you to deduct the entire cost of your cell phone if you also use it for personal reasons. You must determine the percentage of business use. This is the portion of your cell phone expenses that you can write off.
Tracking Your Usage: The Best Way to Prove Business Use
The best way to calculate your business use percentage is to keep detailed records. This typically involves tracking your phone calls, text messages, and data usage for both business and personal purposes. The more meticulous your records are, the stronger your claim will be.
- Keep a log: Create a spreadsheet or use an app to track each business call, text, and data session. Include the date, time, duration, and purpose of the communication.
- Review your phone bill: Cross-reference your log with your monthly phone bill. This will help you identify the total cost of your cell phone service.
- Estimate data usage: If you use data for business purposes, estimate the percentage of your data plan used for business activities.
Calculating Your Deduction: A Simple Formula
Once you’ve determined your business use percentage, you can calculate your deductible expense. Here’s the basic formula:
(Total Cell Phone Cost) x (Business Use Percentage) = Deductible Expense
For instance, if your annual cell phone bill is $1,200 and you determine that 70% of your usage is for business, your deductible expense would be $840 ($1,200 x 0.70 = $840).
Depreciation vs. Expense: Understanding Your Options
When it comes to claiming your cell phone expense, you generally have two options:
Option 1: Claiming the Expense
If the cost of your cell phone is relatively low, or if you primarily use your existing phone for business, you can typically deduct the business-use portion of your monthly service fees. This includes the cost of your data plan, talk time, and text messages.
Option 2: Depreciation for the Phone Itself
You may be able to depreciate the cost of the cell phone itself if it is used for business purposes. This means you can deduct a portion of the phone’s cost over several years, rather than claiming the entire cost in a single year. The depreciation method you use will depend on the cost of the phone and how it is used. Consult with a tax professional to determine the best depreciation method for your situation.
Understanding IRS Form 1040 and Schedule C
To claim your cell phone deduction, you’ll typically use Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). This form is used to report income and expenses related to your business.
Where to Report Your Cell Phone Expense
On Schedule C, you’ll report your cell phone expenses under the “Expenses” section. Look for categories like “Utilities” or “Other Expenses” (depending on the specific form). Be sure to include a detailed description of the expense, such as “Cell Phone – Business Use.”
The Importance of Accurate Record Keeping
Remember, the IRS may request documentation to support your deduction. This is why accurate record-keeping is essential. Be prepared to provide:
- Your phone bills.
- Your detailed usage log.
- Any other relevant documentation.
The Impact of the Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act of 2017 made significant changes to tax laws. While the core principles of deducting business expenses remain the same, it’s crucial to stay informed of any updates or changes to IRS guidelines. Consult with a tax professional to ensure you are complying with the latest regulations.
Avoiding Common Mistakes: Tips for Success
To maximize your chances of a successful deduction and avoid potential IRS scrutiny, keep these tips in mind:
- Keep meticulous records from day one. Don’t wait until tax season to start tracking your usage.
- Be reasonable in your estimates. Overstating your business use percentage can raise red flags.
- Separate business and personal use as much as possible. Consider having a separate phone or line for business if you have significant business use.
- Consult with a tax professional. A qualified tax advisor can help you navigate the complexities of the tax code and ensure you’re claiming all eligible deductions.
The Benefits of Claiming Your Cell Phone Deduction
Properly claiming your cell phone deduction can offer several benefits:
- Reduced Tax Liability: Deducting legitimate business expenses reduces your taxable income, leading to a lower tax bill.
- Increased Cash Flow: By reducing your tax liability, you free up cash that you can reinvest in your business or use for other purposes.
- Compliance with Tax Laws: Following the IRS guidelines ensures you are meeting your tax obligations and avoiding potential penalties.
Cell Phone Expenses & Home Office Deduction Considerations
If you have a home office, you might be able to factor in your cell phone expenses when calculating your home office deduction. This is another area where detailed record-keeping and accurate calculations are crucial. Always consult with a tax professional to determine the best approach for your specific situation.
When Is a Cell Phone Not Deductible? Circumstances to Know
While the ability to deduct cell phone expenses is generally available, there are situations where it may not be allowed:
- Primarily Personal Use: If the cell phone is mainly used for personal reasons, the deduction may be limited or disallowed.
- Lack of Substantiation: Without proper documentation to support your business use, your deduction may be denied.
- Employee Reimbursement: If your employer reimburses you for your cell phone expenses, you generally cannot deduct them on your personal tax return.
Frequently Asked Questions
What if I use my phone for both business and personal use, but I don’t track my usage?
Without proper documentation, it’s difficult to substantiate your business use percentage. The IRS may disallow the deduction, or you may face penalties. It’s best to begin tracking your usage as soon as possible.
Can I deduct the cost of accessories, like a phone case or charger, along with my cell phone?
Yes, you can often deduct the business-use portion of accessories that are necessary for your business. Keep receipts and track their use for business purposes.
Do I need to itemize deductions to claim the cell phone deduction?
No, you can claim the cell phone deduction even if you don’t itemize deductions. This is because the deduction is reported on Schedule C, which is separate from itemized deductions.
What if I have multiple cell phones for different business purposes?
You can deduct the business-use portion of the expenses for all cell phones used for business. You’ll need to determine the business use percentage for each phone separately and track the associated costs.
Is it possible to deduct the cost of a cell phone plan if I haven’t purchased a new phone?
Yes, you can deduct the business-use portion of your monthly cell phone plan fees, regardless of whether you have a new phone or an older model. The key is to accurately determine and document the business usage percentage.
Conclusion: Maximize Your Deduction, Minimize Your Tax Liability
Determining whether you can write off a new cell phone purchase in 2020 depends on your business use and meticulous record-keeping. By understanding the IRS guidelines, tracking your usage accurately, and consulting with a tax professional, you can maximize your deductions and minimize your tax liability. Remember to maintain detailed records, be reasonable in your calculations, and stay informed of any changes to tax laws. By following these steps, you can confidently navigate the tax implications of your cell phone expenses and ensure compliance with IRS regulations.