How to Claim Your Home Internet Deduction

The deduction rules depend on your choice of business entity (proprietorship, corporation, or partnership).

Home Internet Deduction on Schedule C

If you operate your business as a sole proprietorship or as a single-member LLC, you file a Schedule C to report your business income and expenses. As a Schedule C taxpayer, you may deduct ordinary and necessary expenses, which include business-related internet subscription fees.

You can deduct your use of your home internet whether or not you claim the home-office deduction, as follows:

• • If you claim the home-office deduction on your Form 1040, the internet expense goes on line 21 (utilities) of IRS Form 8829 as either a direct or an indirect expense.
  • If you do not claim the home-office deduction, enter the business portion of your internet expenses as utilities expenses on line 25 of your Schedule C.

Home Internet Deduction When You Operate as a Corporation

 

When you operate your business as a corporation, you are an employee of that corporation. Because of the Tax Cuts and Jobs Act (TCJA), the only way for you to reap the benefits of the home internet deduction is to have your corporation reimburse you for the expense. In the case of a reimbursed employee expense,

• the corporation deducts the expense as a utility expense, and
• you receive the reimbursement as a tax-free reimbursed employee business expense.

Why is the reimbursement method the only way for the corporate owner to get the deduction? The TCJA eliminated the 2018-2025 deduction for miscellaneous itemized expenses. These include unreimbursed employee expenses, such as internet connection fees.

Deduction When You Operate as a Partnership

If you have deductible home internet expenses and operate as a partner in a partnership, you have two ways to get a tax benefit from the home office:

1. 1. Deduct the cost as an unreimbursed partner expense (UPE).
   2. Or get reimbursed from your partnership via an accountable plan (think “expense report”).

 

Substantiating Your Home Internet Expense Deduction

 

Where business owners can run into trouble with the IRS is in substantiating their internet expense deduction.

You should have no problem showing the total cost for your home internet connection—just total your monthly bills. The problem is in establishing what percentage of the total cost was for business because only that percentage is deductible.

Ideally, you should keep track of how much time you use your home internet connection for business and how much time for personal use. A simple log or notation on your business calendar or appointment book—indicating approximately how many hours you were online for business each day while working at home—should be sufficient.

Google it, and you can find software and apps that will track your internet use.

Instead of tracking your home internet use every day throughout the year, you could use a sampling method such as that permitted for tracking business use of vehicles and other listed property. There is no logical reason the IRS shouldn’t accept such a sampling for internet use.

Takeaways

The entity you choose for your business operation determines the strategy you need to use to deduct your home internet expenses. For example, if you operate as a Schedule C taxpayer, you can deduct your use of your home internet whether or not you claim the home-office deduction, as follows:

If you claim the home-office deduction on your Form 1040, the internet expense goes on line 21 (utilities) of IRS Form 8829 as either a direct or an indirect expense.

If you do not claim the home-office deduction, enter your internet expenses as utilities expenses on line 25 of your Schedule C.

When you operate your business as a corporation, you are an employee of that corporation. Because of the TCJA, the only way for you to reap the benefits of the home-office or home-internet deduction is to have your corporation reimburse you for the deduction. For reimbursed employee expenses, the corporation deducts the expenses, and you receive the reimbursements as tax-free reimbursed employee business expenses.

If you have deductible home internet expenses and operate as a partner in a partnership, you have two ways to get a tax benefit from the home office:

• Deduct the cost as a UPE.
• Or get reimbursement from your partnership via an accountable plan, such as an expense report.

If you claim the home-office deduction, you can deduct your home-internet costs based on either

• the home-office percentage use of your home,
• or a direct or individual cost allocation.

Ideally, you should keep track of how much time you use your home internet connection for business versus personal use. You can use a sampling method to reduce this record-keeping burden. Also, you can lighten the load with an internet-use tracking app.

If you lack adequate records of your home internet use, the IRS and the Tax Court may accept a reasonable estimate under the Cohan rule. But there must be some reasonable basis for the estimate, such as records showing the type of work you do at home. And even with this, both the IRS and the court will lower your deduction because you failed to keep the records.

If you would like to discuss how your work at home creates tax deductions, please call me on my direct line at 509-543-7600 or send a request HERE.

March 2022

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