A few months ago during tax season I wrote about how changing wireless phone billing practices are having an impact on income tax preparation practices. But I did not realize the extent of that change – and how it directly applied to me – until now. I concluded that I can legitimately deduct 98% of my Verizon Wireless bill as an ordinary and necessary business expense. I suspect that other similar taxpayers might find similar usage patterns that justify taking higher portions of their cell phone bill as a business deduction. It may well be worth the accounting and tax analysis exercise that I describe below.
Years ago tax professionals concluded that deducting too much of a cell phone bill raised a red flag for potential audit. The issue applies primarily to self-employed taxpayers but could be an issue for employees as well. In 2006 Entrepreneur Magazine recommended an approach suggested by tax attorneys contributing to the article of looking at the phone bill details to see what portion is actually justifiable business expense. While professional tax advisers might have typically deducted a third or half of the total cell phone bill in the past, I suspect that in some cases much larger portions of the cell phone bill are justifiable business deductions today.
I notice this past month that my Verizon Wireless bill skyrocketed after a change of business equipment and this prompted me to take a closer look at the underlying issues driving this expense. Most of that effort was focused on how to control data usage that had soared to 30GB for the month. The monthly bill is likely to remain above $300 going forward even with my efforts to limit data use. A side impact of this analysis is that I realize that the change in usage and billing has income tax implications.
“It’s all about the data”
The basic tax principle is that cell phone and internet use must be allocated between business and personal use. A close look at my bill shows that an overwhelming portion of the bill is for mobile data use (including VOIP telephone). I suspect that a large portion of the data is for cloud-based services since I don’t store any data on local devices. The business also broadcasts a live video feed called the “bay cam” that has been popular in drawing visitors to the business web site. Very little of the overall bill is for telephone or texting. The portion of the bill of the bill for telephone use is so small (my bill showed 44 telephone minutes and zero text messages), certainly less than 5% of the total overall usage as to be excludable for purposes of this expense analysis for income tax calculation purposes. I know my personal phone use is much more than 44 minutes per month but I did not realize that most of it is not billed because they are also on Verizon Wireless network. Also, inbound calling – which is the large majority of my telephone use – does not show up on the bill. Apparently even the telephone time with my wife, for example, doesn’t even show up on the billing because she is on Verizon Wireless on her own account. (We know we could save money by being on the same Verizon account but we never managed to negotiate that part of the marriage deal). Regardless, I am doing a billing analysis here and it is clear that I am not being billed any substantial amount for telephone or text usage.
Devices used exclusively for business
In my case, I have 5 devices racking up Verizon Wireless billing fees, as shown in the picture provided by Verizon above. My business is located in a rural area without wired internet or telephones. The first 4 devices are stationary and used exclusively at the business location and do not travel with me and are not used for any personal purposes. The 5th is my personal iPhone that is used for both business and personal purposes. The “charges by line” feature on Verizon Wireless billing tells me that 83% of the total bill is for the devices that are used exclusively at the business location (and therefore, I’m asserting, all deductible business expense) and 17% of the bill is for the iPhone that must be allocated between business and personal use.
Personal use is a tiny portion of the bill
A closer look at the charges on the 5th phone (my iPhone) showed that the large majority was for data use while at the business (the same pattern as the other 4 lines). The “charges by line” billing page tells me that 17% of the overall bill is for the iPhone, the only device that can be used for personal non-business purposes. Then if I use the “view data utilization” billing feature for that line, it shows me that 2/3 of the data use for that line was “web and application” and “cloud and file sharing” use while the device was used as a mobile hotspot. I only use the “mobile hotspot” feature while travelling for business. Rather than beg clients if I can tap into their WIFI, I simply connect my PC to the iPhone to access accounting data. The 2nd largest category of use was “social media” which for me means Facebook. I have about a dozen business Facebook pages besides my personal page. I use Facebook groups for business support, including several tax and accounting groups. It would only be a guess, but perhaps 80% of my Facebook use is for business and about 20% personal.
If I apply this logic to allocating the charges on the iPhone between business and personal use then I could conclude that not more than 10% of the iPhone bill is for personal use. Since the IPhone is only 17% of the overall bill, then 1.7% of the overall Verizon Wireless bill is personal use. This let me to the conclusion that 98% of my cell phone bill was justifiable business expense.
My Verizon Wireless bill is likely to remain stable for the rest of the year and fortunately IRS does not require me to go through this detailed analysis every month. I expect to revisit this issue later in the year. If the expense trend holds, it might actually be possible to deduct 98% of my total wireless bill as an ordinary and necessary business expense. That would be a significant deviation from current standards, and that’s why the topic merits this attention.