For the past fifteen years or so, Real Estate Agents and small business owners have evolved to share a single trait; they use a cell phone in their business. For many agents, their personal cell serves double-duty as their business phone. Some owners (like myself) utilize an app that allows their cell to communicate via a separate business number. Others own more than one mobile device - one for personal use and another used exclusively for business.
This article will discuss how the deduction for verbal business communication has changed with the growing prevalence of cellular phones. We’ll also share some tips on how to calculate your cell phone deduction while staying compliant with IRS rules. We’ll then wrap up by helping you substantiate your expense should the IRS question it.
Brief History of the Cell Phone Deduction
Like many things government, the IRS was slow to realize the mobile phone’s importance in business. Part of this lagging acceptance is rooted in the nature of the traditional telephone – the landline. We can attribute the rest to the relative speed with which the mobile phone became an essential business tool. Then there’s Congress’s consistent sluggishness to identify and respond to societal changes.
The Landline: In 2004, nearly 93% of homes in the US had a landline telephone, a phone that communicates via a service wire coming into the house. Only 5% of households had a cell phone, and no landline – cell phones were a tiny blip on the IRS radar. Deducting land-based telephone communications was and remain straightforward. The first line to a personal residence is not deductible – period. It does not matter whether the line gets used for business or not. It is considered a necessary household utility and is not deductible. The only exception is for specific expenses, such as long-distance calls the owner can prove is for business. Additional lines, such as business fax or a business phone, are deductible if the owner can prove business use.
Rise of the Cell: Fast forward fourteen years. In 2018, only 7% of households had a landline and no cell phones. Approximately 37% had both landlines and cell phones. Many of these landlines existed solely to tie a security system to a monitoring agency. Also, in 2018, about 54% percent of households used cells exclusively. They had no landline. Needless to say, small business owners - particularly those on the road as often as Real Estate Agents – have become dependent on their mobile phones. For many, they are the owner’s mobile office.
Changing Deductions: The IRS, or more accurately, Congress, was slow to see the mobile communication trend in the business world. Until 2011, cell phones remained what is called listed property. Listed property are assets that lend themselves to both personal and business use. As a result, the IRS requires extensive documentation of the business use of these assets. These requirements created a great deal of confusion about proving business versus personal use. Log every call? Track every minute used and segregate business from private minutes? In short, it was a mess for both employees provided cell phones and business owners using them for business.
After 2011, the IRS removed the listed property designation of cell phones. But this did not mean that personal cell use is entirely deductible for business owners. Owners can only deduct business use and must have a reasonable basis for the deduction. Like, many things IRS, reasonable is the critical term. The amount of business use the IRS will accept as reasonable boils down to facts and circumstances surrounding the phone and business. And, it’s the taxpayer’s job to prove these facts and circumstances – at least to the point of passing that classic auditor hurdle: The Smell Test.
The Cell Phone Smell Test
The IRS (and you) know that it is rare for anyone owning a single cell phone, particularly a modern smartphone, to use it 100% for business. Mobile phones have become the primary method of social media access. They stream entertainment, news, music, and sports. Mobile phones have not just replaced the antiquated landline telephone - for many, they have replaced both the computer and television.
The number of nonbusiness uses a cell phone has is where the highly technical Smell Test comes into play. The test is pretty simple. Based on the nature of your business – your industry, revenue, and clientele– does the cell phone use deducted make sense? In other words, is it reasonable? And, do you have invoices or other evidence to back up the deduction taken?
What’s Reasonable: If you have used a cell phone for several years, you may have noticed that most service providers’ bills have changed substantially. Detailed invoices listing each call and text have largely disappeared. Some include the minutes and bandwidth used for each device, and many show only the plan and amount due.
Under these circumstances, is it reasonable to expect an owner to log each call and conversation length to separate business and personal use? What about internet use and other applications? Tracking this much data is not just unreasonable - it’s likely impossible.
On the other hand, it is also highly unlikely that a business owner with a single cell phone uses it 100% for business. Making such a claim will likely result in an auditor’s smirk, a sure sign you’re failing the smell test. So, let’s return to facts & circumstances.
Facts & Circumstances: The percentage of your mobile phone deductible cost depends on a commonsense assessment of your business and lifestyle. An agent who has separates phones for business and personal use and has only business applications on the business phone might approach 100% business use.
On the other hand, for agents who use a single phone for business and personal calls, 100% would be nearly impossible to achieve. These agents must consider the amount of time they use the phone for business vs. personal, and take the appropriate deduction. To find a reasonable deduction percentage, look at your call log. What percentage of calls are business-related? Consider the amount of data stored on the device. How much is Facebook, Twitter, or Amazon versus business? Many phones can track your use of various applications, such as the Screen Time app on the iPhone. How much time are business vs. nonbusiness applications used? Apply these factors to help determine a fact-based business-use percentage of your phone to deduct. 40%? 60%? 70%.
The process is not as straightforward as logging the number of business miles your vehicle gets driven (which is required). But it will help you achieve a level of reasonableness that will (hopefully) pass the smell test and avoid an auditor’s smirk, or worse - a chuckle.
Some Mobile Tips
Where to Deduct: Unlike the landline telephone, however, mobile phones are not considered a utility for tax purposes. They get deducted as an Other Expense.
Be Reasonable: If we’ve said it once, we’ve said it 1,000 times, and I just repeated it. There’s an ancient tax-saying that applies to reasonableness, “Hogs get slaughtered.” And the IRS’s keen sense of smell makes auditors expert hog-spotters.
If an agent has one cell phone, had three listings last year, and made one sale, does cell use of 80% seem reasonable? If it is, they better be able to prove it. The IRS knows another hog-related fact: A taxpayer who exaggerates one deduction will just as easily embellish another. So, be reasonable.
Deduct only your device: If you have a family plan that charges more than one phone on the same invoice, use your phone’s cost as your deductions starting point. The easiest way to do this is to divide your bill by the number of phones. Are there two phones on the plan, one for you and one for your spouse? Start with 50% of the bill. If your monthly cost is $200, your phone’s share of the bill is $100, or $1,200 for the year. If you use your phone 70% for business, multiply the $1,200 by 70%. Your deduction is $840.
If you decide to use a different method, document your reasons for doing so. For example, if your plan costs $120 for the first phone and $15 per month for each additional phone. If your phone is the primary number, using $120 as the starting point makes sense. If it’s not, you might get stuck with $15.
Using a Separate Phone for Business: If you have a second phone for exclusive business use, consider a separate contract for that phone. It may not be the cheapest route to a deduction. But it removes some of the calculation pitfalls of multiphone contracts. Having a separate bill for your business phone also goes a long way to show your serious about your business.
Proving Your Deduction
Substantiating your cell phone deduction can be a little more involved than other costs. Having receipts is the first step. Next is showing how you arrived at the deduction amount by documenting how you made the calculation. It does not have to be a detailed spreadsheet. Some simple handwritten math showing your phone’s annual business cost may be all you need.
As long as your method is reasonable (that word again!), given your business facts and circumstances, you shouldn’t have a problem. But the closer you get to 100% business use, the more evidence you will need to justify that percentage.
Summary and Invite: We hope this article helps you to more accurately and confidently deduct your cell phone. If you’d like some assistance cutting an agent’s highest cost - taxes, download our FREE Real Estate Agent Tax Organizer.
If you’re extra-serious about minimizing taxes, check out our Real Estate Agent Tax-Cut Library. It contains over eight hours of tax-cutting information broken into twenty-nine searchable volumes. It’s also tax-deductible and pays for itself with the deductions you will find. Want to share your tax-cut with the whole agency? Check out our Broker Version of the Library.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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