Unlock Tax-Free Fringe Benefit Deductions for Your Smartphone

Are you running a business as a proprietorship, corporation, or partnership? (If you're an LLC, you're one of these categories too.) The type of business entity you operate can significantly impact the personal tax benefits you, as a small business owner, can enjoy on your personal smartphone costs, whether it's an Android or an iPhone.

And here's the kicker—depending on your business structure, you can achieve these tax benefits without maintaining any tax records on your smartphone use. Yes, you heard that right! Thanks to the IRS and lawmakers, this is possible.

If you have employees or independent contractors, you can extend this benefit to them too. You can cover their smartphone costs without requiring them to keep any usage records.

Who Qualifies as an Employee?

The definition of an "employee" for this smartphone fringe benefit is broader than you might think. It includes:

• Your current employees (including yourself if you're an employee of your corporation)
• Partners in your partnership performing services for the partnership
• Directors (if you're operating as a corporation)
• Independent contractors performing services for you

Sole proprietors, don't worry—you also benefit from these changes in the law, which we'll discuss later.

How Does the Smartphone Tax Break Work?

When your business provides a smartphone or similar telecommunications equipment (like an iPad or tablet) to an employee or partner primarily for non-compensatory business reasons, the following benefits kick in:

1. The business use of the device is a de minimis working condition fringe benefit, excludable from income.
2. The business or partnership deducts the cost as a business expense.
3. No records of business use are required from the employee or partner (personal use isn't a problem).
4. The tax code's non-discrimination requirements don’t apply, so you can choose who gets the benefits (yes, even if it's just you).

Non-Compensatory Reason

To qualify for this tax-favored treatment, the smartphone must be granted primarily for “non-compensatory business purposes” such as:

1. The employer needs to contact the employee at all times for work-related emergencies.
2. The employee must be available to speak with clients when away from the office.
3. The employee needs to communicate with clients in different time zones outside their normal workday.

As long as one of these criteria is met, your business is in the clear. However, if the smartphone is offered to:

• Promote goodwill or employee morale
• Attract a prospective employee
• Provide additional compensation

It does not meet the non-compensatory test.

Similar Equipment

The term "smartphone" (referred to as a “cell phone” in IRS Notice 2011-72) also includes similar communication devices like tablets. According to the IRS audit manual, tablet devices such as iPads qualify as similar equipment.

Mechanics

Your business doesn't need to buy the smartphone and its calling plan. Instead, you can pay the employee a cash allowance or reimburse the actual plan use.

Example: You pay a flat monthly fee for your smartphone service, which includes the cost of the phone. If you operate as an S corporation, your corporation can reimburse you for the entire monthly fee, even if you use the phone for both business and personal purposes.

The IRS audit manual states that the reimbursements are not income if:

1. The employee maintains smartphone coverage reasonably related to the business needs.
2. The reimbursement is reasonably calculated not to exceed the actual expenses.
3. The reimbursement is not a substitute for regular wages.

There are no accountable plan rules for reimbursement—just a reasonable calculation based on the phone bill suffices.

Smartphones for Sole Proprietors and Single-Member LLCs

For sole proprietors or single-member LLCs not taxed as corporations, the no-hassle smartphone break applies to your employees but not to you. You deduct your business-related smartphone costs like any other business expense, such as rent or utilities. The smartphone itself is depreciated or expensed as capital property.

The silver lining? Smartphones are no longer listed property, making record-keeping easier. However, you still need to offer proof of your business use percentage. If you use your smartphone 75% for business and 25% for personal use, your deduction is based on the 75% business use.

To prove this, keep track of your calls. An easy method is to tally business and personal calls from your smartphone bill. You can use a sampling method for a few months if your call volume is consistent. Alternatively, consider having two phone numbers for your smartphone: one for business and one for personal use.

Independent Contractors

Independent contractors get tax-free, tax-favored employee status for smartphones provided by their employers. This status doesn’t apply to those who are not reimbursed by an employer; they must follow the same prove-your-cell-phone-use rules as proprietorships.

Takeaways

If your business is taxed as anything other than a sole proprietorship, you can have your corporation or partnership pay or reimburse 100% of your smartphone expenses, even for both business and personal use. You can choose which employees or partners get this fringe benefit without worrying about discrimination rules.

Best of all, no record-keeping of smartphone use is required. Just ensure there is a business reason for the smartphone and that it doesn't represent additional compensation.

For sole proprietors or single-member LLCs, keep basic business records on personal and business use and deduct only the business portion. Remember, the smartphone is no longer listed property, simplifying record-keeping.

Embrace these new and improved smartphone rules for delightful tax benefits!