When a business provides an employee or a partner with a smartphone or similar telecommunications equipment primarily for non-compensatory business reasons, the following great things happen:
The employee’s or partner’s business use is a working condition fringe benefit that is excludable from income.
The employee’s or partner’s personal use is excludable from income as a de minimis fringe benefit.
The employee or partner does not have to keep records of business use.
The tax code nondiscrimination requirements do not apply. This means the business can pick and choose who gets the smartphone benefits.
So here is how one of my clients used the rules above. He operates his S corporation medical practice with nine employees. The S corporation gave him the smartphone fringe benefit and did not give that benefit to any other employee.
The client uses the smartphone about 15 percent for business and 85 percent for personal purposes. His annual cost for the phone is $1,260.
Before meeting with me, this client simply ignored the business cost and deducted nothing for this phone. That’s different now.
Here’s how the client is going to benefit this year:
His S corporation will reimburse him $1,260 for his smartphone use. The reimbursement puts $1,260 in his pocket that was not there previously.
The S corporation deducts the $1,260 and passes that tax deduction to the client via the K-1, so effectively the client realizes a tax deduction for the entire business and personal use of the smartphone. In the 40 percent tax bracket, he realizes an additional $504 in cash from this deduction.
And perhaps what makes this client smile the most is, he does not have to keep any tax records to obtain this tax deduction.
How’s that for planning? A $1,764 cash benefit and no tax records needed.