In 1984 Big Brother, via the Tax Reform Act of 1984, decided to restrict the depreciation deduction for the business use of items “lending themselves easily to personal use”, which were labeled “listed property”. Included on the “list” were –
* Passenger automobiles.
* Property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment.
* Computers and related peripheral equipment
In 1989 cellular telephones and “similar telecommunication equipment” were added to this “list”.
Internal Revenue Code Section 274(d) (4) requires that you keep detailed records to document the business use of “listed property”.
With a cell-phone your log would indicate the date, number called, person called, business purpose (or “personal”), and length of call. If the bill listed each call separately you would indicate the cost for each call on the log. If you pay a flat fee for unlimited minutes you would need to do a calculation for each monthly bill.
David Mellem, EA, of Ashwaubenon Tax Professionals, and former Director of Research and popular seminar instructor for the National Association of Tax Professionals, provides special email alerts on tax issues to tax pros. A recent email dealt with court cases concerning the deductibility of cell phone usage.
Here are the court cases discussed by David in his email alert -
* TC Summary Opinion 2009-97 - The deduction for cell phone usage was denied because the taxpayer couldn’t substantiate his business use of the phone. The Court felt the taxpayer did use his cell phone for business purposes, and the taxpayer conceded that he used his cell phone to make personal calls (i.e. call his wife while he was away from home). The taxpayer produced copies of cell phones bills but was not able to show which calls were business and which were personal. As the taxpayer did not provide the substantiation necessary for listed property the Tax Court was required to deny the deduction.
* Philip Jay Berg, 103 AFTR 2d 2009-249 – The taxpayer attempted to claim a deduction without documentation under the famous “Cohan Rule”. But the Tax Court’s decision stated “The Cohan rule does not apply to certain expenses, such as cell phones, automobiles and trucks, which are governed by the strict substantiation requirement of §274(d).”
* T.C. Summary Opinion 2009-81 – The Tax Court denied the deduction for cell phone usage. The taxpayer indicated that his employers suggested that drivers might find cellular telephones useful but did not reimburse its drivers to have a cellular telephone. He used the cell phone to contact other truckers, shippers, and receivers to discuss such things as the best routes for his particular destination and load type, load weight, and vehicle size. This information is not readily available from typical road maps. These were clearly genuine business calls. The taxpayer also used the phone for personal calls. He did not keep a log of his calls, and estimated that 80 percent of the calls had a business purpose. The Tax Court pointed out that for listed property the taxpayer is required to have adequate records or corroborative documentation. Since the taxpayer relied only on estimated use and did not have the required records or evidence, Tax Court was required to deny the entire deduction.
David tells us that the deduction was also denied in T.C. Summary Opinion 2008-101 and T.C. Memo 2008-280.
The bottom line – if you use a cell phone for business you must keep a log identifying business usage.
FYI - a Cell Phone Log is one of the forms, schedules and worksheets included in “THE WANDERING TAX PRO’S DOCUMENTING 2010 DEDUCTIONS”.