Sometimes, it is the items we least expect that can provide some sort of tax benefit for business owners. Even everyday, innocuous items such as smartphones can become a great tax-free fringe benefit deduction, but it is something that most business owners do not take nearly enough advantage of.
Being a smart and savvy business owner requires a keen understanding of how best to make the financial side of the business work well with operational aspects of the business. In this realm, finding creative ways to ease tax burdens, while still remaining on the cutting-edge technology is a great way to merge the financial and operational elements. Creating tax-free fringe benefit deductions for your smartphone is one method to accomplish this.
The First Step:
finding creative ways to ease tax burdens, while still remaining on the cutting-edge technology, is a great way to merge the financial and operational elements
What is your business entity? This a core element to establish when it comes to creating tax strategies and will have a massive effect down the line. Once you understand what business entity works best for your situation (perhaps a sole proprietorship, or a partnership, or really anything that fits), strive to understand the associated tax benefits with that.
The next goal is to establish the definition of an employee within your organization, and how that fits with your business entity. There are several types of employees, ranging from partners, current employees and independent contractors. These are all examples of types of employees that are able to use this benefit, as it is extremely broad.
Personal costs such as smartphones become a key way to take advantage of this, but it will heavily rely on the type of business you have and the types of employees. Using this benefit means that you are able to take advantage of this, without having to record tax records of smartphone usages - and this also applies to giving employees such as independent contractors smartphones as well.
The Second Step:
Actually establishing this benefit is what we explore in this step. Once a business decides to provide employees with this equipment for non-compensatory business reasons this becomes excludable from the income of the business and it is considered a de minimis fringe benefit.
A smartphone can be provided for the following reasons:
- Employers need to be able to contact employees at all times due to work-related emergencies
- Employees are in a position where they must be able to speak to clients while not in the office, or if clients are in different time zones from the employee
These are the only reasons a smartphone may be provided - not for recruiting purposes or other internal morale-boosting practices. Employers may provide this benefit in whatever fashion they choose - some choose to buy plans and phones, others choose to provide cash allowances or reimbursements for equipment, depending on what works for an individual business.
This benefit, unfortunately, does not apply to businesses that classify themselves as a sole proprietor or a single member LLC. Corporations and other business entities may be able to take advantage of this though, so it is definitely an option worth exploring once you have established what your business entity may be.
Creating a smartphone tax benefit is a great solution for businesses looking to provide their employees with more flexibility as well as mobility. More information can be found on the US Small Business Administration website as well.
If you would like to learn more about this fringe benefit, and whether it is the right option for your business, please contact us. We are happy to use our expertise to guide you, and a create a tax strategy that will remain beneficial for your business and provide true value in terms of benefits.