Running a business is no easy task and it is not cheap either, luckily the Canada Revenue Agency (CRA) allows business owners and self-employed individuals to write off a variety of expenses as a cost of doing business.
However, when it comes to deducting business expenses, many people find themselves asking questions such as what costs can I deduct to help lower my taxes? What percentage of these costs should I deduct? What happens if I deduct too much?
As accountants that specialize in helping construction and professional service-based companies, one of the most commonly asked questions we get is:
Can I write off my cell phone?
Like many other business-related questions, the answer is complicated.
There is no hard and fast rule, and what works for one business, may not work for yours. There are many factors that you need to consider when deciding if you are going to deduct the expenses related to that little supercomputer that hangs out in your pocket.
If your cell phone usage is 100% business
Congratulations! You're following the #1 golden rule of business: keep business expenses and transactions separate. As long as you can prove that the use of the phone is strictly for business, you can deduct 100% of the bill.
Keep in mind that if you bought the phone outright, and the cost is high enough, you may need to determine the capital cost allowance and spread the cost over a few years.
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If your cell phone usage mixes business with pleasure
The majority of entrepreneurs will fall into this category, and that's understandable. Trying not to lose one phone is hard enough! imagine keeping track of two. You can still deduct the business use of the phone, it just takes a little math.
You need to look at your bill and consider a few things.
What extra features does my plan include that I use for business?
Maybe you pay for an international calling plan. Is that because you make regular business calls to other countries, or is it because your entire family lives in the States and you moved to Canada?
If the added expense is for business purposes, it can be deducted as an expense. If it’s a combination of both business and personal use, look at your bill and determine the percentage of calls that are business related.
Data is another feature that regularly increases with business usage. If you upped your data plan so you can email on the go, or send videos to project managers, you could deduct a percentage as an expense.
Let's say that your monthly cell phone bill is $120.
The international calling plan you have is $20. You only call clients internationally, never personal calls.
After reviewing your bills, you determine that your business use of the phone is 60%.
This means you can expense $20 (international plan) + 60% of $100. So the total you could write off is $80. (You can claim the percentage of GST as well).
When you are determining how much of your cell phone bill to claim as an expense, keep in mind that the CRA could require proof in the event of an audit. A general rule of thumb we like to live by is to underestimate business usage. This means if you determine that you use your phone 50% for business use, claim 30%. This will give you some grace in case you increase personal usage occasionally, or the CRA doesn’t agree with your calculations.
In the case that the CRA does not agree with your percentage of usage, they will determine what they think is a reasonable allowance, or will not allow the deduction at all and recalculate your taxes based on your reassessed income.
As long as the cell phone plan in question is reasonable and you are able to back up your business usage, you can deduct a percentage or the entire cost of cell phone services. The cost of the phone itself would be considered an asset and needs to be handled differently. If you are claiming any portion of your cell phone bill, make sure to include the appropriate amount of GST to your Input Tax Credits as well.
If you have more questions regarding business deductions or how much you should claim reach out. We're happy to help navigate the ins and outs of business taxes.