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Tax-Free Fringe Benefit – Smartphone

Are you maximizing the potential of your business’s fringe benefits? Imagine offering your employees a perk that’s also a tax deduction for your business. Discover how providing smartphones can transform your tax landscape and delight your employees—without the headache of meticulous record-keeping.

Business Structure and Tax Benefits

Are you operating your business as a proprietorship, corporation, or partnership? Your business entity significantly impacts the personal tax benefits you can enjoy from using a smartphone, whether it’s an Android or an iPhone. Your entity type determines how you can maximize these benefits without the hassle of maintaining extensive tax records on your smartphone use. For this convenience, you can thank the IRS and the lawmakers.

If you have employees or independent contractors, you can extend this benefit to them as well. By covering their smartphone expenses, they also get to enjoy these perks without the burden of detailed phone use records.

Who Qualifies as an Employee?

The definition of “employee” for this fringe benefit is broader than you might think. It includes:

  1. Current employees (including you if you are an employee of your corporation).
  2. Partners in a partnership performing services.
  3. Directors (for corporations).
  4. Independent contractors performing services.

Sole proprietors, however, are excluded from this list. But don’t worry, there are benefits for you too, which we’ll discuss later.

How the Smartphone Tax Break Works

When your business provides a smartphone or similar telecommunications equipment to an employee or partner primarily for non-compensatory business reasons, here’s what happens:

⦁ Businesses can deduct smartphone costs.
⦁ Recipients don’t pay taxes on this benefit.
⦁ Recipients don’t need to keep records of business and personal use.
⦁ Businesses can select which employees or partners receive this benefit without any non-discrimination requirements.

Qualifying for the Tax Break

To qualify, the business must provide the smartphone for “non-compensatory business purposes.” These can include:

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

If your business meets one or more of these criteria, you’re in the clear. However, if the smartphone is provided to boost employee morale, attract a prospective employee, or as additional compensation, it doesn’t meet the non-compensatory test.

Similar Equipment

The IRS defines a smartphone (or “cell phone” in IRS Notice 2011-72) to include similar communication devices such as tablets and iPads.

Payment Mechanics

Your business doesn’t need to purchase the smartphone and its calling plan outright. Instead, it can offer a cash allowance or reimburse the actual usage costs. For example, if your business is an S corporation, it can reimburse you for the entire monthly fee of your smartphone, even if you use it for both business and personal calls. According to the IRS audit manual, such reimbursements are not considered income if:

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

Sole Proprietors and Single-Member LLCs

If you’re a sole proprietor or the owner of a single-member LLC, the no-hassle break doesn’t apply to you. Instead, you deduct your business-related smartphone costs like any other operating expense. The good news is smartphones are no longer classified as listed property, simplifying the record-keeping process. However, you must still prove the percentage of business use. For instance, if your phone use is 75% business and 25% personal, you can only deduct 75% of the costs. One efficient way to track this is by tallying business and personal calls from your smartphone bill or using a sample method for a few months.

Independent Contractors

Independent contractors receive tax-free, tax-favored employee status for smartphones provided or reimbursed by their employers. However, independent contractors not reimbursed by an employer must follow the same rules as proprietorships, maintaining proof of business use.

If you would like help with embracing tax benefits in your business, contact Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open Monday – Thursday 9 am to 5 pm. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and Hagerstown Hotlist 2024, we have been providing a Less Taxing Life and More Prosperous Solutions for 40 years!

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Earl L. Crawford, Jr. 1937-2024

Earl worked for Goodyear Tire and Rubber Company for 30 years before going into business for himself at Crawford Tire from 1981 until 2019.

Dennis W. Flythe 1953-2024

Denny attended Greencastle Antrim High School and graduated from Delaware State University. He focused on providing for his family and creating a legacy.

Arnold W. Wagaman 1939-2024

Arnie was employed at Mack Truck as a quality control specialist until his retirement; a total of 39 years. In his free time, he enjoyed fishing and gardening.

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