Is a Cell Phone a Deduction for the Self-Employed?

Determining what is deductible and what is not is often a difficult process. One area that the IRS continually gets questions about is home office deductions and what is deductible and what is not. Another common issue is utilities, including gas, electricity and telephone expenses.

The General Principle of Business Deductions

The IRS uses a simple formula to determine whether an expense is deductible. It must pass this test before it can even be considered. To be considered a business expense, it must be ordinary and necessary. Ordinary means that it is common and accepted in your type of business. In this case a telephone is common in almost every business, but the question is, is a cell phone common in your type of business? The second part of the question is, is it necessary? The IRS specifically states that necessary does not mean indispensable but rather helpful and appropriate.

Separation from Personal Expenses

The second test the IRS uses is whether the expenses can be considered personal expenses. They are very concerned that you not be able to simply say all personal expenses are really business expenses and therefore everything you buy is deductible. So they draw a distinction. But the IRS does say that if you use something for both personal and business purposes you can deduct the business portion. You simply need to use a reasonable method to determine the percentage used for business purposes.

Telephones

If you have a home office, the IRS has specific rules regarding the deducting of a telephone. You can't deduct the cost of the first line or even a portion of the first telephone line. The IRS says, "The basic local telephone service charge, including taxes, for the first telephone line into a home is a nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into a home used exclusively for business, are deductible business expenses."

Cell Phones

Since the IRS does not specifically mention cell phones, you need to decide based on the rules we have mentioned so far whether your cell phone qualifies as a business expense. The following questions will help you: Do you have another phone for personal use? Are the majority of the calls on your cell phone of a business nature? Do clients call primarily on your cell phone? Do you need it because you are "on call" at all hours? Do you need it to stay in touch because you travel to visit customers or job sites? If you can answer yes to question No. 1 and some of the other questions, you have good reason to believe that your cell phone is a deductible expense.

References

• IRS: Business Expenses
• IRS: Home Office Deduction Reminders

Resources

• IRS: Other Expenses