As our busy lives continue to blur the line between “business” and “personal,” it’s a good idea to review the tax treatment of common business items that also may lend themselves to personal use, causing some confusion. Below is guidance on the top three: computers, cell phones and travel.
- Computers. Computers are considered listed property, a specific class of depreciable property subject to a special set of tax rules, unless the equipment is used exclusively at a regular business establishment and owned by the person operating the establishment. Computers considered listed property must be used for business more than 50% of the time to be considered an expense for tax purposes. As listed property, computer-related expenses are subject to the Code Sec 274(d) substantiation requirements, meaning they must be substantiated by providing adequate record of: amount, time and business reason for the use of the listed property. The taxpayer must provide written documentation and taxpayer-maintained records to prove each element of substantiation. The taxpayer also must maintain a log of the business use.
- Cell phones. Cell phones are no longer considered listed property due to a provision in the Small Business Jobs Act of 2010, so they do not have the added record keeping requirements of computers categorized as listed property. Under the guidance issued, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.
- Travel. Business trips, conventions and continuing education seminars are frequently planned to incorporate leisure time. Naturally, you are not prohibited from enjoying non-business or personal activities while on a business trip, but the primary reason for the trip (and the majority of time spent) must be related to your trade or business. The additional expense incurred to have a spouse join you is also not deductible (or reimbursable under an employer’s travel plan), unless your spouse also is a legitimate employee within the business. There are also special rules for conventions outside of North America.
Convention expenses include:
- registration and attendance fees
- taxi and other local transportation
- toll telephone calls and computer rental
- 50% of the cost of the meals
Remember to keep detailed records and a daily log of convention expenses. Travel expenses are also subject to the substantiation requirements of Code Sec. 274(d). You may deduct (or exclude from income if paid by your employer) only the costs associated with the business portion of the convention. Most importantly, conventions, conferences and seminars must be related to your business and they must benefit your business activities.
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This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.