Tax Trolls Episode 8- iPhone Tax Write offs for Business

Disclaimer- This podcast is for entertainment purposes only. If you have any questions about taxes or any financial matters please consultant a professional accountant.

Lenard: Hello friends, this is Lenard de Guzman with Argel Sabillo, CPA. We're here doing a Tax Trolls episode. In this episode, we're going go over iphone deductions which you can write off, CPA tips because there are a lot of apps now and there's a lot of questions. Before we get into it quick disclaimer, this podcast is only for entertainment purposes only if you have any issues, accounting questions please find a professional accountant to help you. So let's get into the episode. Alright so, first of all, the IRS right has a thing called ordinary necessary expenses for businesses. The iPhone which I use all the time for everything; for calls, text, apps. Let's break it down, what can you write off, what can't you, what are good guidelines especially start-ups? Argel?

Argel:   You were kind of breaking on that last part.

Lenard:  Okay, so I was asking what are good tips for especially business owners and tech start-ups. What are good guidelines? Everyone runs on, whether it's an iPhone or Android phone. What do you think about it? What are good guidelines about it?

Argel: Right, I'm actually using my iPhone to do this zoom call right now. So this is a good example of an ordinary necessary business expense using my iPhone for business to make this podcast possible but also every day I'm on my phone replying to my clients or I even use Google Drive. All the business apps I have downloaded on my iPhone so I'd say a high percentage of the time I use my phone for business. I rarely do any like personal calls. I don't even know anybody who's like call it's all like text or media. So there are a couple, in terms of guidelines obviously the very most important thing is that you have to be able to justify or prove that you using your phone for business and not for personal.

I think that for example if before when I used to work for one of the big four accounting firms I used to have two phones. One was for my personal phone and the other one was provided by my employer and because my employer gave me the allowance to have that business phone then my employer could deduct a hundred percent of the iPhone that they provided me, right. And that's a good indication that it was mostly used for business because I also had a personal phone. In terms of like entrepreneurs and freelancers who would be cost-prohibitive to have two phones, they only have one phone so for the most part, you apply a percentage right. 

So let's say oftentimes with entrepreneurs and also like freelancers, it'll be a multi-plan. It would be your girlfriend is on it, your mom and dad is on the same plan so you want to make sure that if you're deducting say the mobile plan that you're only deducting the distance portion of it. So basically if there are four people on the plan you only need up 25%. And if that 25%, let's say 90% is used for the business then you take 90% of that 25% that would be your deduction for your mobile plans. 

Lenard:  When you say divide it is that like what? What are you dividing? Dividing like the minute you use, like screen time? I get it, the IRS says okay if you use it like you said 25% you could deduct 25 of say, hardware maybe? The IRS is kind of vague and it's like it feels outdated so when you take 25%. What's the metric? How do you measure it?

Argel: Well the 25 percent example that was if there are four people on the plan and it's one out of four so that's 25% reasonable test. The other portion is how much usage you're using your phone for business versus personal. I think that's kind of subjective and it's a matter of would you be able to like get in front of the IRS ever to question it and say okay give me a reasonable estimate why you would say it's 90% and not like 25%? I mean if they want to get specific he could look at data and your usage of data. 

I would say in general the only reason why an IRS agent would completely disallow your business expenses is that if you don't even have a business, to begin with or you just may be freelancing and then maybe you have one client per year. So for me to take a 90% deduction on my business phone when I only have one client per year to me that seems a little fishy versus somebody who's continually growing their business scheduling calls with clients or scheduling like potential. You can see other business expenses as well that would coincide with your usage of the phone. Does that make sense?

Lenard: Yes, because it's like you're justifying like you said the one client using it or maybe the client makes you like $100,000 revenue for the year or maybe they're like calling you like five times a day. Maybe a PR agency because the iPhone has a camera, it has a calculator which I use sometimes. You could justify and then like here we're creating content where you're on your phone, it's marketing. So your advice is just to be able to like if you do get audited to be able to justify it to the IRS and say this is what I do. it's okay.

So then like apps, like uber right, uber does rides which you know the IRS guideline is you could use it but not to commute on your regular commute but if I'm meeting clients, I'm going to meetings to I guess maintain it right, maintain relationships, okay. So what's your take on let's say uber? On the uber app, there's a business payment part where you can sign up and separate it. So what's the deal with that?

Argel: Well luckily both lyft and uber now have the ability to separate. So you can sync up your business card and also your personal card for personal uber. But yes, in general, you want to make sure that when you're selecting those setting that is charging the right account. I would say that as you said for commute you can't deduct that but if you're going to meetings or let's say I'm going to the office but instead of going to the office I'm going straight to the client right. So then can I deduct my commute from my home to the clients right?

So that depends if you have a home office then you can deduct 100% of it but if you are basically on a day-to-day office and then and then you know maybe 500 feet away is your client, you can deduct that uber trip from your house to the clients house or to the clients office because you could just like walk home walk to your office next door. But yeah in general I mean these are again it's trackable because you have a history in your uber trips and at the end of the day you need to be able to justify the trip from A to B and who was that meeting with in case you get audited. But also realize that the IRS understands that it's a lot of burden to document everything and so part of the ways that they would let's say you get audited, one of the ways that they would work with you it's like some reasonableness test right. 

So it's like okay you're in a business of accounting and you have clients and you're expected to be with them you know when you're a service business then you can kind of expect having transportation costs like meeting the clients as supposed to say I don't know, if I'm a freelance writer or something remotely and I fly to go see my client in California and I'm all the way in New York. I mean obviously there could be a reason why you're flying to your client but for the most part, I think they would look at it as is this ordinary necessary for the type of business you’re in.

Lenard: I see, so here's an interesting question I have. So uber does uber eats right and so the IRS says what meals and entertainment are deductible, when you say meals right traditionally you would eat like at a restaurant right or someplace where you could have coffee and talk about putting together some sort of I don't know, whatever business arrangement right. So can you justify like Danny and uber eats and like sitting I don't know, at like let's say like in my house or maybe like a park or somewhere not traditionally or historically kind of, I guess compliant if that's the right word? What's your opinion on that? 

Argel: So I think I mean if you're providing fringe benefits to all your employees to say hey we're going to order uber eats and it's for everybody in the office we're celebrating or it's a big win so we're going to treat everybody and you treat everybody fairly and this is one of the benefits that they receive yeah you can order uber eats and then hundred percent of that expense including the fees of uber eats is deductible. 

Lenard:   Okay, so what about if I'm meeting with you or with someone, whether it's a prospect or client right. Let's meet at a place that's not a restaurant and we get uber eats and we eat at like the Santa Monica Promenade or the beach on a bench, is that deductible?

Argel: Yes, that's still deductible especially we were there to me and talk business and we're able to document that that was the business meeting and who you met with and you kind of some content or what you talked about those are the type of documentation if the IRS would ask. But again in an audit, they would look at all your business meals entertainment and they're going to look at if it's significantly higher than like your other expenses then they would assess whether or not you were also expending some of your personal meals. They look at it from the top-down approach and then they're going to hone in and tell you to give us some examples or give us some documentation on this. Then for as long as you have some sort of documentation or you're working with a CPA that I could provide that documentation then already the IRS can gain comfort that you have some sort of system that you're not just mixing your personal and your business expenses.

Lenard:  Okay, so just be consistent and use it for business expenses. Okay, so because apps now, like zoom right they're on laptops and they're on apps and then so that's safe right they're conducting meetings. With Google now because you have email in the suite that Google's using their version of Word, Excel, PowerPoint that saves okay. So what so as long as, it's hard to do right where you separate business and personal, so those apps that you use like say Photoshop those are safe. So what about something like Airbnb right. You use Airbnb to stay, maybe you're conducting business internationally you guys stay at an Airbnb say in Hong Kong. How does IRS interpret that, do they say it's like they count it like a hotel? How does that work?

Argel: Yes, I think that counts as a traveling expense and it would be an equivalent of staying at a hotel and it's the same thing where I would say compared to hotel, Airbnb would be kind of a little bit it would be scrutinized more because you know generally people use Airbnb for personal travels. More and more you'll see corporations would allow having Airbnb as one of the places that their employees can stay. So yes, I think it could get questioned but at the end of the day, it's the same thing as you know you can stay at a hotel. And that hotel you don't have any form of documentation why you travel to Vegas for example and would be scrutinized if you don't have any good reason on why you were there or have some sort of like itinerary of what you were doing there for business versus personal. 

So I think the lesson here is that it doesn't matter I can collect receipts and basically go through the trash and then keep the receipts of other people. That doesn't mean that now that I have receipts I'm never going to get questioned by the IRS and on the flip side I could not generate receipts but I could have some sort of like expense tracking app where I'm saying you know I'm documenting who I had lunch with or what type of business meeting it was you know that's more defensible than just selecting receipts are staying as like a business hotel or something like that. Does that make sense?

Lenard: Yes, makes sense because like hotels also they're like there's a correlation where there's like conferences held at hotels. So it makes sense.

Argel: I do actually have another point to make. When it comes to Airbnb because more and more you see Airbnb also providing experiences right. So everything I think is charged under one account and so let's say I did Airbnb it was a business expense, I was there for nine days and then one day in the middle of my break I decided to do one of the excursions offered by Airbnb experiences. And it was for personal use, it was just for me to say go to the gym or go on a walk right. So that portion of going on a walk, technically you're supposed to be deducting that. Taking that out from the Airbnb business expense right. 

Now things like that, let's say the IRS asked for documentation and receipt or invoice from Airbnb and then they saw that there was you know staying nine days there's the fee for that and in the experiences. Then they asked what that experience was and it was personal, then that kind of raises the red flag with the IRS and go okay so you are kind of mixing your business and personal here and either you forgot to take it out or you purposely didn't take it out let me dig deeper to see what else are you mixing your business and personal. So unless they see something that kind of raises the red flag they're not going to dig in deeper. That's why having an organized way to separate your business and personal I think says a lot to an IRS agent when they're auditing you. 

Lenard: Okay, what other apps, let's see.

Argel:  Well, while you're thinking of apps, let's talk about hardware. So your phone your, headphones I mean these are like.

Lenard: Keyboard

Argel: I mean these are expenses that are like over a thousand dollars right. So it's almost like a computer at this point I mean that is your iPhone is a computer and so historically you're supposed to depreciate your iPhone and your computer and laptop so what that means is that you can't just 100% deduct your computer your hardware I mean your iPhone because it lasts multiple years. So you're supposed to depreciate it based on how long your iPhone would last. A couple of things, one, back then if you are 100% using your phone for business then you can deduct and depreciate your phone right. 

Then also if you are using your phone less than 50% for business then you're supposed to like depreciate it longer but all of that went away. With the new small business rules now is that if you have an iPhone you can deduct 100% for business. You can basically depreciate it and then accelerate the depreciation right away.

Lenard: And then also too, Apple started doing, they say it's like a subscription where I can get an iPhone every year so I'm actually leasing it. IRS likes it better when you're doing that you're basically leasing the phone. Do they like that better because like okay I'm leasing it like I lease a car and that's like I don't own it right because if I own it the principle is that if I own it I'm going to use it for business but maybe I'm going to use it personally but if I'm leasing it, I don't own it. Does the IRS look at that differently?

Argel: Yes, so the IRS looks at it differently. Well, the personal and business-like commingling those they're going to look at it whether or not it's leased or owned. They want you to separate those two regardless of what you're doing. But when it comes to owning versus leasing that's actually a good question because that is like one of the top tax planning for most businesses is that why should I own my car when I could just lease it. If I own my car for business and I have to depreciate it over five years whereas if I'm leasing it I can deduct it like right away right. 

I mean there are like certain rules on lease inclusion which is not that significant in this situation but it's something that the IRS doesn't like because now you're accelerating your deduction meaning that they get to collect less in taxes. It's really good for the owner because now my phone for example if I let's say there was no bonus depreciation or I, purchased this phone and I have to depreciate it. So now I have to depreciate it for five years and let's say it's a thousand bucks now I can only deduct a hundred even though I paid a thousand for it. And I have to wait five years before I can fully deduct it. Well, if I was leasing it I can say that, hey I get a new phone every year and so this isn't something that would last five years.

This is just going to last me until I am ready to upgrade and it's leased and I don't own it so I should be able to deduct a hundred percent of it now and not wait years two three four and five before I can deduct it. So the benefit of being able to lease is that I can just deduct a hundred percent of what I paid now.

Lenard: I think that's enough. That's a lot for the viewers to digest. So I think maybe we'll do another iPhone apps episode maybe we won't. So hopefully the viewers tune in to the next tax trolls episode. So Argel do you have any closing remarks on this topic or we're good, what's up?

Argel:  I love the iPhone more than I love Android so. Do they have a program as well that you can trade-in your phone every year?

Lenard:  I don't think so. I think I have an iPhone for 10 years or so. I can go to a Microsoft store and check but I doubt it.

Argel: Switch to iPhone and go on the yearly plan, that's my advice.

Lenard: Get the iPhone with Apple financing only two bucks. I think they do financing for the laptops and other hardware too so that could be an option. 

Argel: Oh and if it's 100% for business, you can deduct the interest a 100%.

Lenard:  I think we are endorsing Apple products we should get them as sponsors.

Argel: They should sponsor at least this episode.

Lenard: Yes. Alright so tune in. Did you say something?

Argel: No, that's it.

Lenard:  Alright, peace out.