I know many of you die-hard Apple fans have already been to an Apple Store and tried on the new watch. Others of you have probably seen the ads and wondered if -- or rather how -- this new device will truly change your life for the better.
So wouldn’t it be nice if the Apple Watch was also deductible as a business expense? It should be, right? You need it in your business in order to be more effective and efficient as a communication tool and the IRS should see it our way…well…maybe hold the phone for a moment.
If you own a small business, you should already know that since 2011, your cell phone and other similar telecommunications equipment are specifically excluded from the definition of Listed Property (IRS Notice 2011-72). Meaning you don’t have to provide a log detailing your personal and business use on the device. In fact, if you can show you have a home phone line and need your cell phone for business, you can typically deduct 100 percent of your cell phone and the accompanying service.
Moreover, under IRS Code, any expense that's ordinary and necessary for that business is deductible, and would typically include related telecommunications equipment like a Bluetooth or headphones and mic for those important business calls. (IRC Section 162)
So why shouldn’t the Apple Watch be deductible?
Many of the watch’s features are similar to a smartphone or Bluetooth device and can enhance your business sales and work productivity. Some of these features include calendar alerts for business appointments, business related texts, business calls, work email, social media for your business, Apple Pay for quick business purchases and immediate access to Apple’s business-friendly apps. Not to mention the added benefit of a built-in speaker and microphone that gives you hands-free ability to take that conference call while on the road (as well as look like Sean Connery from a 1970s James Bond movie).
The risk I foresee with the Apple Watch is that the IRS may consider it “Listed Property,” requiring strict proof of evidence for business use. If this happens you’d be required to provide adequate records or sufficient evidence corroborating the need for the deduction. (IRC Section 274(d))
However, there's always additional guidance when it comes to the devices and technology business owners use daily for business. For example, by definition, a computer in an area of the home that qualifies for home office deductions is not Listed Property and the substantiation rules would not apply (see IRC 274(d)(4) and Zeidler, TC Memo 1996-157). In that same light the Apple Watch could be considered an extension of your work cell phone that will help increase productivity, sales, etc.
Currently the IRS hasn’t taken a position on the new device and with their current understaffed work load, it probably won’t be any time soon.
Bottom line: At least some portion of your Apple Watch should be tax deductible, and it will depend on your business use of the functions. Speak with your accountant and have a serious conversation about how much you should deduct on your tax return.
By the way, if you were lucky enough to try on the 18-Karat Gold Case Apple Watch -- retailing for a cool $17,000 -- don’t think the extra benefit of all that glitter and gold is going to be tax deductible. It’s the functions that matter.