Happy iPhone 5 announcement day! Just hours ago in San Francisco, Apple unveiled the 6th generation iPhone, the thinnest & lightest ever.
Can’t wait to get your hands on the slim & sleek new device? Good news: If you’re self-employed and you’re planning on buying an iPhone 5 to use as your business phone, you may be able to deduct the cost. We turned to Lynn Wilson, Lead Researcher at the Tax Institute at H&R Block, for some answers to a few of our questions.
Block Talk: I’m self-employed — and I’m psyched to buy the new iPhone 5! Can I deduct the cost of the device as a business expense this year?
Lynn Wilson, TTI: Yes, the cost of the iPhone 5 may be a deductible expense for your business, even though there probably are less costly (and less cool) phones available to you to purchase for your business. The IRS does not require that you purchase the least expensive item available, but does require that the expense be ordinary and necessary to your business and be used solely for business to be deductible. This means if you buy the phone exclusively for your business, the entire cost is a business expense. If instead it is also your personal phone, only the portion of the business use compared to the phone’s total cost can be a business expense. Most phone companies send itemized phone logs with the bill. You can base the business percentage of usage adding up the business calls and minutes to total minutes used.
BT: Can I deduct the cost all at once, or depreciate and spread the deduction out over a few years?
TTI: The tax rules stipulate that cell phones can last more than one year. This means you are only available to deduct a portion of the cost for each year of the phone’s useful life under the MACRS depreciation system. If you use the phone more than 50% of the time for business, you may be eligible for a faster depreciation method, such as the Section 179 depreciation or bonus depreciation. See Chapters 2 and 3 of IRS Publication 946.
BT: What about deducting the monthly cell phone bill?
TTI: If you only use the phone for business, your entire monthly bill is deductible. If you use part of it for personal calls, only the portion of the flat fee and the additional charges that are used for business is a deductible business expense. Use the itemized bill to figure your percentage of business use.
BT: What documentation will I need to deduct the cost of my monthly cell phone bill?
TTI: Although cell phones are no longer considered listed property and therefore not subject to the strict substantiation requirements that apply to listed property, adequate records must be kept to document any expense. This means you should probably keep all the itemized phone records that the phone company sent you as well as the receipt of the initial purchase of the phone. Additionally, if the cell phone is purchased for exclusive business use, you may need to substantiate that you have another phone available for personal use.
New scenario: Let’s say you’re not self-employed — and you happen to work for a really cool company. Your question may be a bit different.
BT: My awesome employer bought me the new iPhone 5! Is this considered a fringe benefit?
TTI: Yes, the value of the iPhone 5 provided to you that qualifies for working condition fringe benefit treatment can be excluded from your gross income. A working condition fringe benefit is any property or service provided to an employee by an employer, to the extent that the property or service would have been deductible (as either a trade or business expense or as a depreciable asset) by the employee if the employee had paid for the property or service. Further good news is that if the business use is excluded under the working condition fringe benefit rule then the value of any personal use of the cell phone may also be excluded.