Mixed-Use Expenses: Business-Use Percentage of Phone and Car

How do I work out the business percentage for my phone, internet or car?

Deduct only the business part of a cost that is partly personal. Publication 334 says to separate the personal part from the business part, and that the personal part is generally not deductible. The percentage is the business-use share, worked out for each cost. Once you have it, the books show only that share as an expense; the personal share goes to owner's draw or never enters the books (third section).

The IRS publications and instructions this page cites set no method for a phone or internet percentage. The share is a judgment, and it has to be one you can explain and back with a record of how the line is really used. The IRS sets no sample-month rule for a phone or internet, so the record has to fit the whole year, not one unusual month. Pick one basis, write it down and apply it the same way each month, so you can explain it later.

Your case is not simple if:

• A car has no mileage record for the year. The business share of a car cannot rest on an estimate (Publication 463).
• A car's business share is close to the 50% line that decides how it is depreciated.
• One plan covers several people, such as staff or family lines.
• Mixed bills run through a business card or account and the books show the personal part as expenses.
• Earlier years were booked without any split.

Gather each bill, odometer readings at the start and end of the year with the trip log, the loan statement, the insurance bill, and which account paid each one.

Do I have to do anything in the books after I know the percentage?

Yes. A percentage changes nothing until the books apply it. If the full bill stays in expenses, the books show a personal cost as a business expense, and a return prepared from them may deduct it. If nothing is booked, the business share goes unclaimed. Publication 583 says the books must show gross income, deductions and credits.

1. Record the percentage, its basis and the date it starts, next to the cost.
2. Book each bill with the split when you record it (next section). A cash-method return generally deducts the business share in the year it is paid, so if your books accrue bills, match the timing before the return is prepared (Schedule C instructions).
3. At year end, replace any estimate with the year's actual figure. For a car, that is the year's total miles. One adjusting entry fixes the difference.

Should I record the whole bill and move the personal part, or record only the business share?

Either way gives the same deduction. Choose by the account that pays the bill, and keep the same method for each bill through the year; switching mid-year makes the books harder to follow. An owner's draw is money you take out for yourself; it is not an expense. An owner contribution is money you put in; it is not income.

Publication 583 says to use the business account for business only, and to write checks to yourself only for personal withdrawals. A mixed bill paid from that account is partly a personal withdrawal, so make the draw entry in the same month. For where a draw sits in the books, see recording owner's draws.

In a multi-member LLC taxed as a partnership, the personal part is usually booked as a distribution to the member who benefited. A genuine loan to the member is different. A payment settles a guaranteed payment only if it is for services or the use of capital and set without regard to partnership income, and the partner reports it as income (26 U.S.C. 707(c)); a label in the agreement does not change what the payment is. Where one plan serves several members, first separate business use from each member's personal use. A partnership reports only trade or business deductions on lines 9 through 21 of Form 1065 (instructions). See personal expenses paid from the business account.

Does it change anything if the business share is small or large?

For any share, only the business part is deductible and the rest is personal. Two things shift.

• Car depreciation. Above 50% business use, faster depreciation is available. At or below it, the car is depreciated straight line, and a later drop can bring earlier extra depreciation back into income (Publication 946). A car at or below it in the year it is placed in service stays straight line even if use later rises. A car that used the mileage rate in its first year and later switches to actual costs is also limited to straight line (Publication 463; see standard mileage or actual car expenses). The rules are in buying a vehicle through your business. The standard mileage rate has no threshold: it multiplies business miles only.
• Which way to book. Pay a mostly personal bill from a personal account and a mostly business bill from the business account. Then the part you have to move is the smaller part.

A phone or internet plan has no threshold in these publications.

What goes in the books for a car under the mileage rate and under actual costs?

Under the standard mileage rate the books carry one car expense: business miles times the rate, plus business parking, tolls and the business share of vehicle personal property tax. Under actual costs they carry each running cost at its business share, plus depreciation.

Sources: Publication 463, Publication 334 and Topic 510.

For a car you own personally, the mileage amount has no bank transaction behind it, so it is a journal entry with an owner contribution on the other side. If the business owns the car or pays its costs, book what it actually pays and reconcile to the mileage deduction at tax time; the mileage figure is not an owner contribution. A bill the rate already covers should not also sit in expenses, or the car is deducted twice. How to choose a method, and whether you can switch, is in standard mileage or actual car expenses. What a log must show is in mileage log requirements.

Is the principal on my personal car loan an expense if I pay it from the business account?

No. Book it to owner's draw if the car and loan are yours personally, or against the loan balance if the loan is on the business's books. Principal repays borrowed money; it is not a cost of using the car. Publication 463 counts the amount you borrow as part of the car's basis, and the standard mileage rate already includes depreciation. The car's cost comes back through depreciation or the rate, so deducting principal as it is paid would deduct the car twice.

The interest is different. A self-employed person can deduct the business-use part of car loan interest on Schedule C, even when using the standard mileage rate (Publication 463). The personal part is not a business cost and stays out of the business books. It may qualify as qualified passenger vehicle loan interest on Schedule 1-A (Form 1040); the same interest cannot be deducted twice (Publication 463).

A car you owned before the business is covered in putting personal assets into your LLC.

Does the first home phone line or home internet count, and what about a home office?

A mobile plan or home internet is a mixed-use cost: deduct a business share you can support. The IRS publications and instructions this page cites say nothing about either, because their phone rules are written for a landline.

The base charge for the first landline into your home is a personal expense. Charges for business long-distance calls on that line, and the cost of a second line used only for business, are deductible (Publication 587). If the second line also has personal use, deduct its business percentage, as the Schedule C instructions describe, on line 25, Utilities.

A home office deduction is separate. It uses the share of the home's area, and certain telephone expenses are deducted on their own lines, outside the home-office limit (Publication 587). Count each cost once, either inside the home-office deduction or on its own line, never both. Whether you qualify and how the percentage works are in the home office deduction.

What if my percentage changes during the year?

For a phone or internet plan, use the new percentage from the date use changed and leave earlier months as booked. Note the date and the reason next to the cost, for example when a plan became business-only or stopped being used for work.

A car is different. Its percentage is business miles over total miles for the whole year (Publication 946), so a monthly figure is only an estimate. Book with a stated estimate, such as last year's percentage, then adjust with one entry at year end when the true miles are known.

If the car moved from personal to business use during the year and you have no mileage records for the earlier months, Publication 463 has its own calculation: the business-mile share for the period after the move, times months of business use over 12. Keep the date of the move. See putting personal assets into your LLC.

Which Schedule C lines do these costs land on?

The Schedule C instructions put car costs on line 9 and depreciation on line 13. They name no line for a mobile plan or internet.

Using the same line each year keeps years comparable. A partnership has no car or phone line on Form 1065: car loan interest goes on line 15, depreciation on line 16a, and other business costs on line 21, Other Deductions, with a statement listing each by type and amount (instructions).

What records support the percentage?

Records made at the time of use are worth more than a statement prepared later (Publication 463). A bank statement alone does not do it: Publication 583 says proof of payment does not by itself establish a deduction.

For a car, Publication 463 says amounts you approximate or estimate cannot be deducted. Keep the business-use records for each year of the depreciation period.

Keep records that support a deduction for at least 3 years after the return is filed or its due date, whichever is later. Some cases run longer, and records on the car itself are kept until the limit runs out for the year you dispose of it (Publication 583). If a log is missing, see rebuilding a mileage log.

Example

These examples are illustrative; all figures are in US dollars.

A freelancer's phone

A freelancer pays a $120 phone bill each month from the business account. Her work use is 60%. She books the full $120 to phone expense, then moves $48 to owner's draw. The expense is $72 a month, $864 for the year. Had she paid by personal card, she would book $72 to phone expense with $72 credited to owner contribution. The deduction is the same.

A delivery driver's car and loan

A driver covers 15,000 miles in the year, 9,000 of them for deliveries, so 60% is business. He uses actual costs. His $1,800 insurance bill gives a $1,080 business share. One payment of $500 on his personal car loan leaves the business account: $380 is principal and $120 is interest. The principal goes to owner's draw, not to expense. Of the interest, $72 is interest expense and $48 goes to draw. The car's cost comes back through depreciation at the business share, reported on Form 4562 and not shown here. Under the standard mileage rate the insurance would not be deductible at all, because the rate covers it.

A designer's home internet

A designer pays $900 a year for home internet. A record of use across several typical months supports 25% work use. The business share is $225, and the other $675 stays personal. She pays from a personal account, so she books only the $225 to the expense, with a matching owner contribution. The deduction depends on that record.

Different for you?

• Your business share is large and you have no log or support, or one plan serves several people: the percentage you can support and the monthly entries are bookkeeping work. Start with rebuilding a mileage log, then see bookkeeping help.
• Earlier years deducted the whole bill with no split: the books and the filed returns may both overstate the deduction. Whether to amend those returns depends on the years, the amounts and your filing history. Sorting out which years and bills are affected is bookkeeping help work.
• A car's business share sits near 50%: how the car is depreciated can change on that line, so confirm the year's miles before you book. See buying a vehicle through your business, then bookkeeping help.
• Mixed bills run through a business card or account and the books show personal costs as expenses: months of this are untangled in fixing commingled funds, and rebuilding books that will not reconcile is covered by bookkeeping help.
• An S corporation repays you for a phone, home office or car: the repayment rules are in reimbursing owner expenses.
• The car or equipment was yours before the business: see putting personal assets into your LLC.
• A partner paid a shared cost personally: see partner-paid LLC expenses.
• You are deciding whether the phone handset is an expense or an asset: see expensing or capitalizing small purchases.