Can I Write Off A New Cell Phone Purchase 2021? Your Comprehensive Guide to Business Expense Deductions

Buying a new cell phone is a common occurrence in today’s world. But can you write off a new cell phone purchase in 2021? The answer, as with many tax-related questions, is: it depends. This guide will break down the rules and regulations surrounding deducting your cell phone as a business expense, helping you understand how to maximize your deductions while staying compliant with the IRS.

Understanding the Basics: Business Expenses and Deductions

Before diving into the specifics of cell phone deductions, it’s crucial to understand what constitutes a business expense and how deductions work. A business expense is any ordinary and necessary expense you incur for your trade or business. This means the expense must be common and accepted in your line of work and helpful and appropriate for your business.

The IRS allows you to deduct these expenses to reduce your taxable income. This ultimately lowers the amount of taxes you owe. However, you must keep accurate records to substantiate your deductions. This includes receipts, invoices, and any other documentation that proves the expense.

Qualifying for a Cell Phone Deduction: The Business Use Test

The cornerstone of deducting a cell phone purchase lies in proving its business use. You can’t simply deduct the entire cost if you use your phone for both personal and business purposes. Instead, you need to determine the percentage of business use.

To do this, you’ll need to track how you use your phone. Keep a log or use a tracking app to record the time spent on business calls, emails, and other business-related activities. The more detailed your records, the stronger your case will be if the IRS ever audits you.

Deducting the Cost: Two Main Methods

There are two primary ways to deduct the cost of your cell phone:

Method 1: The Actual Expense Method

This method allows you to deduct the actual business-related expenses. This includes the cost of the phone itself, as well as monthly service charges, data plans, and accessories.

• Depreciation: The cost of the phone is considered a depreciable asset. You can deduct a portion of the phone’s cost each year over its useful life.
• Monthly Service: You can deduct the percentage of your monthly service costs that corresponds to your business use. If you use your phone for business 60% of the time, you can deduct 60% of your monthly bill.

Method 2: The Simplified Method (Home Office Deduction)

This method allows you to deduct a portion of your home office expenses, including the cost of utilities, phone service, and other expenses. This method is generally simpler, but you can only use it if you qualify for the home office deduction.

Records, Records, Records: The Key to Successful Deductions

Regardless of the method you choose, accurate record-keeping is paramount. The IRS requires documentation to support your deductions. Here’s what you need to keep:

• Purchase Receipts: Keep receipts for the phone itself and any accessories.
• Monthly Bills: Save your monthly cell phone bills.
• Usage Logs: Maintain detailed logs or use apps to track your business usage. Include the date, time, purpose, and duration of each business-related call or activity.
• Mileage Logs (if applicable): If you use your cell phone for business while traveling, keep a log of your business mileage.

Without proper documentation, the IRS may disallow your deductions.

Specific Scenarios and Considerations

Let’s consider some specific scenarios:

Self-Employed Individuals

Self-employed individuals can generally deduct cell phone expenses directly on Schedule C (Form 1040), Profit or Loss from Business. This is where you report your income and expenses.

Employees

Employees can deduct unreimbursed business expenses, including cell phone costs, on Schedule A (Form 1040), Itemized Deductions. However, the deduction is limited to the amount exceeding 2% of your adjusted gross income (AGI). This means you can only deduct expenses above a certain threshold.

Business Owners with Multiple Phones

If you own a business and provide cell phones to your employees, the rules are slightly different. You can deduct the cost of the phones and the associated service as a business expense. However, you must ensure these phones are primarily used for business purposes.

Avoiding Common Pitfalls

There are several common mistakes to avoid when deducting cell phone expenses:

• Insufficient Documentation: As mentioned repeatedly, failing to keep adequate records is the most common mistake.
• Overstating Business Use: Be honest and accurate in your assessment of business use. Overstating can lead to penalties.
• Mixing Personal and Business Expenses: Keep your personal and business expenses separate.
• Not Understanding Depreciation: Properly calculating depreciation is essential if using the actual expense method.

The Impact of the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 significantly impacted many tax deductions, including those for employees. The law suspended miscellaneous itemized deductions subject to the 2% AGI limit. This means that many employees can no longer deduct unreimbursed employee expenses, including cell phone costs. However, self-employed individuals are still able to deduct these expenses.

Maximizing Your Cell Phone Deduction in 2021

Here are some tips to help you maximize your cell phone deduction:

• Track Everything: Keep detailed records of all your business-related cell phone activity.
• Choose the Right Plan: Select a cell phone plan that meets your business needs and budget.
• Consult a Tax Professional: If you’re unsure about the rules, seek advice from a qualified tax professional. They can help you navigate the complexities of the tax code and ensure you’re taking all the deductions you’re entitled to.
• Use a Dedicated Phone (Optional): If your business use is significant, consider getting a separate phone for business purposes. This simplifies tracking and documentation.

Frequently Asked Questions (FAQs)

What if I use my phone for both work and volunteer activities?

You can only deduct the portion of your cell phone expenses related to your business activities. Expenses related to volunteer work are generally not deductible unless they are directly related to a qualifying charitable organization.

Does the type of phone I buy matter?

The type of phone you buy doesn’t directly impact the deductibility. What matters is the business use of the phone. However, a phone with features that enhance your business productivity might justify the expense.

Can I deduct the cost of my phone accessories?

Yes, you can deduct the cost of accessories like headphones, cases, and chargers if they are primarily used for your business.

What happens if I get audited?

If the IRS audits you, they will review your documentation to verify your deductions. They may request receipts, usage logs, and other supporting documents. Be prepared to explain how you calculated your business use percentage.

Is it worth the effort to track my cell phone expenses?

Yes, absolutely! Even a small deduction can save you money on your taxes. The effort required to track your expenses is often outweighed by the tax savings.

Conclusion: Navigating the Cell Phone Deduction Landscape

In conclusion, the ability to write off a new cell phone purchase in 2021 depends on your business use and your record-keeping practices. By understanding the rules, tracking your usage meticulously, and consulting with a tax professional when needed, you can maximize your deductions and minimize your tax liability. Remember that accurate documentation is the key to a successful deduction, and staying compliant with the IRS regulations is paramount. By following the guidance provided in this comprehensive guide, you can confidently navigate the complexities of cell phone expense deductions and ensure you’re taking advantage of all the tax benefits available to you.