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Create Tax-Free Fringe Benefit Deductions For You Smartphone

If you operate your business as an LLC, then your LLC falls under one of the three categories (Proprietorship, Partnership or Corporation). The category of your business entity can make a big difference when it comes to the personal tax benefits you enjoy on your personal smartphone costs, be it Android or iPhone. Based on your business operation, you can get tax benefits without keeping tax records of your smartphone use.
Now, you can pay for the smartphones of your employees or independent contractors without requiring them to keep any phone use record. Here are some improved smartphone rules you will like:

Who is an employee, and why ask?

The definition of the employee is broader when it comes to smartphone working conditions fringe benefit. It includes:
  • Your current employees, including you if you are an employee of your corporation
  • Partners in your partnership performing services for your partnership
  • Directors of the corporation and
  • Independent contractors offering services for your business
If you are a sole proprietor, this does not include you.

How does the smartphone tax break work?

If a business gives an employee or a partner a smartphone, iPad, or tablet for non-compensatory reasons, then here is what happens:
  1. The employee’s or partner’s business uses a de minimis working condition fringe benefit that is excludable from income.
  2. The business or partnership deducts the cost as a business expense.
  3. The employee or partner does not have to keep records of business use.
  4. The tax code non-discrimination requirements are not applicable, meaning businesses can pick and choose who should be given smartphone benefits.

Non-compensatory reason

To qualify for this tax benefit, the business must give the smartphone benefit to the partner or employee for non-compensatory business purposes like the following:
  1. The employer needs to be able to contact the employee at all times in case of work-related emergencies.
  2. The employer requires the employee to be available for client calls when away from the office.
  3. The employee needs to speak to clients in different time zones outside the employee’s regular working hours.
A business operating as a corporation or partnership will have no problem fulfilling the above criteria.

Your business does not meet the non-compensatory test if the smartphone is given to:

  • Promote goodwill or a particular employee’s morale
  • Attract a prospective employee or
  • Provide additional compensation to an employee

Similar equipment

The smartphone includes similar equipment mentioned in the IRS audit manual- IRS Notice 2011-72). Tablets and iPads are also similar equipment.

Mechanics

The business need not invest in a smartphone or calling plan for its employees or partners. Instead, it could pay the employee a cash allowance or reimburse them for using the call plan.

According to the IRS audit manual, the reimbursement is not income if:

  1. The employee maintains smartphone coverage that relates to business needs.
  2. The reimbursement is reasonably calculated not to exceed expenses incurred in maintaining the phone and
  3. The reimbursement is not a substitute for the employee’s regular wages.
There are no accountable plan rules for reimbursement. You can simply reimburse depending on your phone bill.

Smartphone for the sole proprietor and the Single-Member LLC

The IRS’s no-hassle smartphone break applies to your employees but not to you if you are a sole proprietor or the owner of a single-member LLC that’s not taxed as a corporation. If you are in the out-of-favor group, you deduct your monthly business-related smartphone costs similar to any other business operating expenses like rent or utilities. You depreciate or expense the cost of the smartphone itself, like any other capital property like computers.

Your only good news, that smartphones are no longer listed as property, is the change in the law, not from the IRS.

But you have to provide proof of the percentage of business use. If you use the smartphone for 75 percent of your business and 25 percent of your personal use, your proprietorship deduction for depreciation, expenses, and monthly charges is based on 75 percent of your business use. Keep records of your calls to prove 75 per cent business use. The easiest way is to tally the business and personal calls on the bill as proof of usage.

However, there is no need to scrutinize every smartphone bill for the entire year and categorize every call if you maintain the same number of calls every month.

If you are unhappy with checking your phone bills for business calls, get two numbers for your smartphone: one for personal use and the other for business.

Independent contractors

The IRS grants independent contractors tax-free, tax-favored employee status for smartphones given to them or reimbursed by their employers.

This favored-employee status does not apply to independent contractors who are not reimbursed for smartphone use by an employer. Unreimbursed independent contractors are proprietorships for smartphone use and thus are subject to prove the cellphone use rules.

Takeaways

Businesses taxed as anything other than sole proprietorship can have your corporation or partnership reimburse or pay 100 per cent of your smartphone expenses even while you use your smartphone for both business and personal.

The corporation or partnership can choose which employee or partner gets the fringe benefit.

The good news is that neither you nor your employees need to keep track of smartphone use.

According to the general rule, fringe benefits cannot represent compensation to the employee or partner, and there should be a business reason for smartphone usage.

The rules apply to all partners and employees but not sole proprietors or single-member LLCs taxed as sole proprietors. They can keep track of the business calls and deduct for business usage only. The smartphone does not fall under the listed property, so there is no time-consuming record-keeping.

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