What expense category is Telephone Expenses?

In today's interconnected business world, telephone expenses – from traditional landlines to mobile services and VoIP solutions – are a fundamental operational cost. For accountants and Small to Medium-sized Business (SMB) owners, correctly categorizing these expenses is vital for accurate financial statements, effective budget management, and ensuring tax compliance.

This article will explore the telephone expenses category, provide important considerations for classification, list common examples, detail the tax implications according to IRS guidelines, and discuss how Fyle can streamline and automate the tracking of these crucial business costs.

Telephone Expenses Category

Telephone expenses refer to the costs incurred by a business for voice and data communication services used in its operations. These are generally considered ordinary and necessary operating expenses. In most accounting systems, telephone expenses are typically classified under:

• Utilities: This is a common category where costs like electricity, water, and telephone/internet services are grouped. IRS Publication 535 refers to telephone service under its "Utilities" section in Chapter 11.
• Communication Expenses: Some businesses may have a more specific "Communications" category that includes telephone, internet, and other related services.

The primary goal is to ensure these costs are consistently and clearly recorded, allowing for proper financial analysis and tax reporting.

Some Important Considerations While Classifying Telephone Expenses

While classifying telephone expenses might seem straightforward, there are several nuances to consider, especially to ensure compliance with IRS regulations:

Business vs. Personal Use (Crucial for Telephones)

• Home Telephone Line: According to IRS Publication 334 and Publication 535, you cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line into your home, even if you have a home office. However, specific business-related charges on that first line, such as long-distance business calls, are deductible. The cost of a second telephone line into your home used exclusively for business is also deductible.
• Mobile Phones: If a mobile phone is utilized for both business and personal reasons, only the portion attributable to business use is deductible as a business expense. This necessitates an allocation, often based on itemized call logs or a consistently applied reasonable percentage reflecting actual business usage.

Bundled Services

Telephone services are frequently bundled with internet and sometimes television services. Businesses must make a reasonable allocation to separate the cost of the business telephone service (and business internet, if applicable) from personal or non-deductible services.

Employee Reimbursements for Phone Use 

If your business reimburses employees for the business use of their personal mobile phones, it's essential to do so under an "accountable plan". An accountable plan requires employees to substantiate their business expenses and return any excess reimbursement. Reimbursements under an accountable plan are generally not considered wages. If not under an accountable plan, these reimbursements are treated as wages and are subject to income and employment taxes.

Hardware vs. Service Costs 

The monthly service charges for telephone lines are ongoing expenses. However, the cost of telephone equipment, such as a multi-line phone system or specialized handsets, may be considered a capital asset if its useful life extends beyond one year. Such assets would be subject to depreciation rules as outlined in IRS Publication 946. Small, inexpensive phone accessories might be expensed as supplies.

Recordkeeping

The IRS mandates that businesses maintain comprehensive records for all claimed expenses. For telephone expenses, this includes:

• Monthly bills from the service provider.
• Proof of payment (canceled checks, credit card statements).
• For mixed-use phones, records substantiating the business-use percentage (e.g., call logs, annotations on bills highlighting business calls).

Examples of Telephone Expenses

The following are common examples of deductible telephone expenses for a business:

• Monthly service charges for business landlines.
• The business-use portion of mobile phone service plans.
• Costs for business-related domestic and international long-distance calls.
• Fees for dedicated business lines, such as fax lines or direct inward dial (DID) numbers.
• Voice over Internet Protocol (VoIP) service costs used for business communication.
• Business calls made while traveling away from home (e.g., from a hotel phone or using a mobile phone for business purposes).
• Data charges associated with business use of mobile phones or hotspots.
• Installation charges for new business telephone lines (Note: Significant infrastructure costs might need capitalization, but standard line installation is typically an expense).

Tax Implications of Telephone Expenses

Deductibility as an Ordinary and Necessary Expense

Costs incurred for telephone services directly related to carrying on your trade or business are generally deductible under IRC Section 162.

Specific Limitation for First Home Landline

As mentioned, the basic cost (including taxes) of the first telephone line in your home is generally not deductible, even if you work from home. Only specific business-related charges on this line or the cost of a second, exclusively business line are deductible.

Allocation for Mixed-Use Phones

It is imperative to allocate expenses for phones used for both business and personal purposes. Only the business-use portion is tax-deductible. Failing to do so can lead to disallowance of the deduction.

Timing of Deduction

1. Cash Method: Businesses using the cash method of accounting deduct telephone expenses in the tax year they are actually paid.
2. Accrual Method: Businesses using the accrual method deduct telephone expenses in the tax year the liability is incurred (all-events test met and economic performance occurred), regardless of when payment is made. Economic performance for services like telephone typically occurs as the service is provided.

Substantiation Requirements

To claim deductions for telephone expenses, businesses must maintain adequate records. These include itemized bills, proof of payment, and, for mixed-use phones, documentation supporting the allocation of business versus personal use. The IRS recordkeeping guide specifies that documents should identify the payee, amount, proof of payment, date, and a description of the service.

Telephone Equipment

As noted earlier, the cost of telephone hardware (like phone systems or handsets) with a useful life of more than one year should typically be capitalized and depreciated according to IRS Publication 946, rather than being expensed in full in the year of purchase.

How Fyle Can Automate Expense Tracking for Telephone Expenses

Managing telephone expenses, especially allocating personal versus business use and handling employee reimbursements, can be a significant administrative burden. Fyle's expense management platform offers robust automation to simplify this:

Automated Expense Capture from Credit Cards

If your business telephone bills are paid via corporate credit cards linked to Fyle, the transaction details are captured in real-time, providing immediate visibility and a starting point for expense logging.

Simplified Receipt Management

Fyle allows for easy submission and storage of telephone bills. E-bills received via email can be directly forwarded to Fyle, or physical bills can be digitized using the mobile app. All receipts are then centrally stored and easily accessible.

Tracking Recurring Bills

Fyle can help manage and track recurring monthly telephone expenses, making budgeting and forecasting more accurate.

Categorization and Accounting Sync

Ensure telephone expenses are consistently and accurately categorized. Fyle’s deep, two-way integrations with accounting systems like QuickBooks Online & Desktop, Xero, NetSuite, and Sage Intacct ensure that these expenses, along with their proper GL codes (which can be imported into Fyle), are seamlessly exported to your accounting software.

Employee Reimbursement for Phone Usage

If employees use personal phones for business, Fyle facilitates the submission of expense reports for reimbursement. Approvers can review these reports based on company policy (e.g., requiring itemized bills for partial reimbursement) via the mobile app, email, or Slack.

Spend Visibility and Analytics

Gain clear insights into your company’s telephone and communication expenditures. Fyle’s dashboards allow you to analyze spend by category, department, or project, helping to identify areas for cost savings or policy adjustments.

By automating the capture, classification, and reconciliation of telephone expenses, Fyle helps accountants and SMB owners save valuable time, improve accuracy, and ensure tax compliance.