home phone

[oceanlovin'ea]

update

Client who is an employee of hotel chain brought her tax information in Friday. They sold their house in the middle of the year so mortgage interest was half of normal. Even with the deductions I felt were totally acceptable, they don't have enough to itemize this year. So all of this discussion on the phone for her is not an issue any more. She also gave her notice Friday and won't be working for them anymore so 2012 will not be an issue either.

Still working on the LLC client....

Linda, EA

[FEDUKE404]

My view: IS an issue!

Client who is an employee of hotel chain brought her tax information in Friday. They sold their house in the middle of the year so mortgage interest was half of normal. Even with the deductions I felt were totally acceptable, they don't have enough to itemize this year. So all of this discussion on the phone for her is not an issue any more. She also gave her notice Friday and won't be working for them anymore so 2012 will not be an issue either.

Linda, EA

Au contraire....I actually find this thread quite revealing, especially in the area of how IRS regulations apparently can, by some, be "viewed" differently or even simply ignored if they somehow conflict with your personal approach to things.

FE

[Koss]

Service to a Residence

I wasn't following this thread, because I've been too busy. But then I noticed how many replies there were, so I had to take a look.

Now, of course, I have to express an opinion.

Outside of my tax practice, I have worked in the telecommunications industry for the last ten years. That doesn't make me an expert or an authority on all matters associated with telephone service. But it does give me a rather unique perspective.

The code section cited earlier in this thread by MilTaxEA, on the surface, appears to say that the first home phone line is never deductible as a business expense. For ease of reference, I'll cite it here again:

26 USC § 262 - PERSONAL, LIVING, AND FAMILY EXPENSES

(a) General rule
Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.
(b) Treatment of certain phone expenses
For purposes of subsection (a), in the case of an individual, any charge (including taxes thereon) for basic local telephone service with respect to the 1st telephone line provided to any residence of the taxpayer shall be treated as a personal expense.

(emphasis supplied)

This section of the code was probably written long before it was feasible, or even possible, to choose a cell phone as the primary, and indeed the only telephone line in your home.

An IRS auditor might disallow a business expense deduction for a single landline, regardless of the facts and circumstances. And under the wrong conditions, the IRS might even try to impose a penalty for negligent disregard of the rules.

But the langauge of the code itself is still subject to interpretation. The law itself has not changed. But the interpretation and application of the law is likely to change over time.

A court might well reach the conclusion that a cell phone is is the "first telephone line provided" to the "taxpayer's residence." The evidence would show that all personal calls made from the taxpayer's residence are made from a cell phone.

The question for the court would be whether a "telephone line provided to a residence" can be a wireless phone.

I think it can.

There are numerous arguments that support this interpretation.

Wireless carriers are required to impose taxes on each wireless phone number, and the tax jurisdiction is determined by the primary place of use of the wireless phone. This is a technical term used by the Federal Communications Commission. The primary place of use, or PPU, is a physical street address provided by the customer. For many consumers, it may be the same as the billing address. But it does not have to be the same, and it is often different for a corporate account with multiple offices.

Most consumers are clueless about this, and carriers don't do very much to enforce it. But if you have four cell phones on your account, and one of them is used by your mother-in-law who lives 80 miles away, you are supposed to provide her address to the carrier as the primary place of use for that telephone number. Each phone number can have a different PPU. And it actually does make a difference in the taxes that you see on the bill.

So even though most cell phones are portable, and are designed to be used in many different locations, the service is arguably associated with a physical street address.

This is a very persuasive argument that a cell phone can be the first, and the only, telephone line at a residence. The fact that you can take it with you when you leave the house does not change the fact that the telephone must be assigned a primary place of use by the carrier. And if you move, the primary place of use changes to your new home address.

Furthermore, regulatory restrictions prohibit a wireless carrier from activating new service for a customer if the primary place of use is in a market for which the carrier does not have a license. This restriction IS enforced by the wireless carriers. If you already have service and you move, that's a little different. But you cannot activate new service if you provide an address that is outside their licensed markets. If you don't believe me, go to the T-Mobile website and try to order a phone, with new service, as a new customer. You won't even have to put in your name, or a street address. Just pick a phone and a plan, and you will be asked for your zip code. Put in 83629 and see what happens next.

For those who are not yet convinced, consider the fact that Verizon and Sprint now offer wireless telephone service for your residence with a device that is not portable. Sprint Phone Connect, and Verizon Home Phone Connect, are wireless boxes that plug into an electrical outlet, and provide telephone service to a cordless telephone base station. These products are marketed as a substitute for landline service at a residence.

There is no final answer to this question. It is clearly an area where the law has not caught up with the technology of the 21st century.

But the fact is that under the law, wireless telephone service must be associated with a physical street address. Based on the current facts of modern technology and the current laws that apply to wireless telephone service, a court might well conclude that a wireless phone line is "the first telephone line provided" to a taxpayer's residence. The language of IRC 262 does not explicitly refer to landline or wireless service. The use of the term residence does not necessarily mean that the telephone line cannot be wireless. The court would have to decide what the law means today--not what it meant 30 years ago.

If the first line is wireless, then a landline at the same residence cannot also be the first line. On this reasoning, landline service at a residence could be a business expense, even if it is the only landline.

I don't have an opinion as to how well this argument would hold up at an audit, or at the IRS appeals office.

I do think that if such a case reached the courts, the court would probably find that the position was reasonable, even if the court ultimately ruled against the taxpayer.

I also think the question will eventually get resolved, either through concrete guidance from the IRS, or a change in the text of the law, or a Tax Court decision.

But that may not happen very soon.

BMK

[Jesse]

For those who are not yet convinced, consider the fact that Verizon and Sprint now offer wireless telephone service for your residence with a device that is not portable. Sprint Phone Connect, and Verizon Home Phone Connect, are wireless boxes that plug into an electrical outlet, and provide telephone service to a cordless telephone base station. These products are marketed as a substitute for landline service at a residence.

BMK

As always, excellent analysis Burton!


If a phone is required then perhaps this would be the way to go as it is not a "landline" into your home and your cellphone could be personal and the "home" wireless service a second line. In our area Verizon offers the whole house connect for $20/month(+ tax of course).

[oceanlovin'ea]

Fe

I didn't mean that this discussion was not relevant in any way. I am so pleased that so many responded with thoughts. Thank you Burton for your thoughts also. That was very informative as always.

For this particular client, it doesn't affect her return since they aren't able to itemize anyway. But I do think that this is a subject that at some point will have to be addressed by IRS for interpretation.
IRS has several issues that need to be revised but until someone makes enough noise it probably won't happen. For example, the fact that the amount you are allowed for child care credit has not changed in all the years I have been doing taxes and yet the amount that parents have to pay for child care and tripled or quadrupled. Also the base for taxable social security hasn't changed in all my years either and yet incomes have gone up and almost everyone has to pay taxes on their social security unless they really don't have any other income. Said my piece....now I'll be quiet.


Thanks to all.

Linda, EA

[FEDUKE404]

Further considerations

I didn't mean that this discussion was not relevant in any way. I am so pleased that so many responded with thoughts. Thank you Burton for your thoughts also. That was very informative as always.

For this particular client, it doesn't affect her return since they aren't able to itemize anyway. But I do think that this is a subject that at some point will have to be addressed by IRS for interpretation.
IRS has several issues that need to be revised but until someone makes enough noise it probably won't happen. For example, the fact that the amount you are allowed for child care credit has not changed in all the years I have been doing taxes and yet the amount that parents have to pay for child care and tripled or quadrupled. Also the base for taxable social security hasn't changed in all my years either and yet incomes have gone up and almost everyone has to pay taxes on their social security unless they really don't have any other income. Said my piece....now I'll be quiet.


Thanks to all.

Linda, EA

Your points are always relevant and well-stated.

The phone situation does need to be revisited. The cell phone situation has overturned the apple-cart there. At some point the IRS may go to something like "first cell-phone" or similar?

My problem with "allocating" cell phones is which side of the equation becomes relevant. Do you have a "business" phone with de minimis personal use, or do you have a "personal" phone with some business use???

And then the issue of costs appears: I pay the same for my cell phone (and landline ) monthly service whether my business use is 1% or 99%. Where might any extra "business use" cost originate? OTOH, there is no way in hades I plan to go through all of my monthly cell phone records and check off personal/business/in-between? calls.

Our friend Koss also provided some further insights.

And as for changing things: You are correct on the Soc Sec taxable calculations. My guess is there is a little bit of politics entering into that! Personally, I think the maximum net deductible capital loss of $3k, which has apparently been that way since dinosaurs roamed the earth, could stand an uptick.

FE

[joanmcq]

I've taken the regs as 'first phone'. If the only phone is a cell phone, none is deductible, even if used partially for business, unless you can separate out long distance or specific business calls. Since most cell phones no longer charge for long distance or per call, it's unlikely you can allocate any biz use.

I always ask if clients if they have another phone if they want to deduct cell usage.

[taxea]

and many of the cel companies are letting you use the same number you had when it was a landline. I truly think we need an updated ruling from the IRS. Should I face this issue with a client this year I will get a ruling and post it.

[joanmcq]

The regs don't actually reference land lines; as BMK noted, they only refer to the first telephone line into the house. It CAN be the cell phone, if that is the only phone. The regs may be outdated, but are quite clear as to the first line being personal.

[DonPriebe]

The regs don't actually reference land lines; as BMK noted, they only refer to the first telephone line into the house. It CAN be the cell phone, if that is the only phone. The regs may be outdated, but are quite clear as to the first line being personal.

Unless the word "line" itself refers to the cable that enters the residence. Wikipedia is ambivalent on this ...

A telephone line or telephone circuit (or just line or circuit within the industry) is a single-user circuit on a telephone communication system. Typically this refers to the physical wire or other signaling medium connecting the user's telephone apparatus to the telecommunications network, and usually also implies a single telephone number for billing purposes reserved for that user.

[Koss]

Telephone Line

Unless the word "line" itself refers to the cable that enters the residence.

That is one possible interpretation. But I think it is unlikely that a court would rely on such a narrow reading, after taking into account the proliferation of cell phones in today's society.

Cell phones are routinely referred to as "telephone lines," as in "How many lines do you have on your account?" or "I want to add another line."

Even the more literal, 20th-century use of the term presents potential ambiguity. Assuming for the sake of argument that "telephone line" refers to a physical cable or wire that connects my home to the telephone network...

I can have two telephone numbers that operate on the same "line." In other words, I can call up the phone company and say "I want to add another line," and they don't have to run another wire into the house.

That probably wasn't the case way back when IRC 262 was written. There certainly was a time, perhaps as recently as the 1970s or early 1980s, particularly in rural areas, where you couldn't add a second line without having the phone company come out to the house and add additional wiring. But today, the basic wiring usually supports at least two lines.

There's even a service called distinctive ring, available from some landline companies, where you can have two phone numbers but only one line. In other words, you can't use both numbers at the same time. Both numbers operate simultaneously on the same line and the same telephones. You give out your "personal number" and your "business number," and you can tell from the type of ring which number the caller dialed.

For some people, it's a perfect solution. Costs a lot less than two separate lines. Don't need two different jacks, or a multi-line telephone. Both numbers ring on all phones in the house.

But it's not for everyone. Calls to both numbers probably route into the same voice mail box if you don't answer, so you can't have a different voice mail greeting for business calls.

And don't ask me which number is displayed on Caller ID when you make an outbound call. I have no idea how that works, or whether you can control it...

My point is that the definition of telephone line is open to interpretation, based on the context, and that the definition has changed over time...

These are things that a court would have to consider when determining whether a cell phone can be the "first line" of service to a residence.

But I'm not sure it will reach the courts any time soon. Even in a basic IRS audit, they might just accept the argument. If the person works from home and is required to use a landline for work (this was the original question), and it is the only landline in the house, and they use it only for business, and they have a cell phone for personal use...

The auditor might just accept the fact that the cell phone is the primary, personal telephone, and the landline is exclusively used for business.

Even IRS auditors occasionally use common sense.

BMK