Taxation & Estate Planning

Is Your New iPhone 3G Tax Deductible?

By Darrin Mish

Taking a tax deduction for your new iPhone 3G (or other cell phone) and the monthly service bill that accompanies it may be a bit more complicated than you think, even if it is used primarily (or exclusively) for business purposes. It's complicated because cell phones are considered "listed property" by the Internal Revenue Service and have been since 1989. "Listed property" includes items obtained for use in a business but designated by the Internal Revenue Code as lending themselves easily to personal use. The designation of an item as listed property has implications for depreciation deductions taken by the business and the computation of net income if there is an ongoing expense linked to the listed property. In the case of your new iPhone 3G, you have the electronic device (or handset) and the monthly service bill (expense) that accompanies its use.

Claiming any deduction for your iPhone 3G will be dependent on the circumstances. If you are in business for yourself, your new iPhone 3G must be both an ordinary and necessary business expense. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. If you are an employee and use your iPhone 3G to perform your job, it must be both for the convenience of your employer and required as a condition of your employment. For the convenience of your employer means that your use of the iPhone 3G is for a substantial business reason of your employer. Required as a condition of your employment means that you cannot properly perform your duties without your iPhone 3G.

With the mobility of today's workforce and the amount of travel some jobs require, it's not necessarily difficult to meet these conditions. However, just meeting these conditions is not enough because remember … cell phones are designated as "listed property" by the IRS. The use of "listed property" for business purposes needs to be substantiated. In the case of your new iPhone 3G that means making sure you receive an itemized monthly bill, "itemized" means one that lists every phone call made and received, not just the "services" you pay for. If your cell phone service provider cannot provide you with a list of your monthly phone calls you will need to keep a log. Regardless of whether you get an itemized bill or keep a log the business purpose of each call must be noted. This information is used to determine the percentage of business use for your iPhone 3G. Simply, claiming 100% business use won't suffice.

In depreciating your iPhone 3G the depreciation method you use will depend on whether you meet the more-than-50%-use test. You meet this test if you
use your iPhone 3G more than 50% for business purposes. If you meet this test, you can claim accelerated depreciation under the General Depreciation System (GDS). In addition, you may be able to take the section 179 deduction for the year you place your iPhone 3G in service. If you do not meet the more-than-50%-use test, you will be limited to the straight line method of depreciation under the Alternative Depreciation System (ADS). Additionally, you will not be able to claim the section 179 deduction for your iPhone 3G. The percentage of your monthly iPhone 3G service bill attributable to business purpose is deductible against business income. In many cases this percentage could vary each month, detailed records will substantiated the annualized total you claim, making your new iPhone 3G tax deductible.

In summary to claim an income tax deduction for your new iPhone 3G you need to begin by documenting your business use, either by obtaining an itemized bill or keeping a log yourself. Because it's likely the business versus personal usage will vary from month to month throughout the year, the percentage of your bill deductible each month will be limited to that month's business use percentage. When you are finalizing your income tax return at the end of the year, you will simply average each monthly business use percentage for an annualized percentage of business use in determining what depreciation options will be available to you. If your average business use is greater than 50% you will have more depreciation options for your iPhone 3G, including taking a section 179 deduction for the year it was placed in service. It's recommended that you have a tax professional look at the specifics of your situation before claiming any deductions. Remember, with listed property like your iPhone 3G, documentation supporting your claim of business use, is key.

Full post as published by IRS Problem Solver Blog on August 18, 2008 (boomark / email).