Given the connected nature of remote work these days, you likely use your home internet to do a little or a lot ofwork.
In this article, you will learn how to deduct the cost of your home internet. The rules that apply to the home internetalso apply to all the other expenses incurred while working at home, regardless of whether you claim the home-office deduction.
Let’s get started.
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 reportyour business income and expenses. As a Schedule C taxpayer, you may deduct ordinary and necessaryexpenses, 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:
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- 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 expensesas utilities expenses on line 25 of your Schedule C.
Deduction When You Operate as Corporation
When you operate your business as a corporation, you are an employee of that corporation. Because of the TaxCuts and Jobs Act (TCJA), the only way for you to reap the benefits of the home internet deduction is to have yourcorporation reimburse you for the deduction. 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 eliminatedthe 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 geta tax benefit from the home office:Deduct the cost as an unreimbursed partner expense (UPE).
- 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.
Unless you have a home internet connection you use solely for business and also have another one for personaluse, you can’t reasonably deduct your entire home internet connection expense.
The IRS won’t believe you make no personal use of your sole home internet connection. We would not believe you either.
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 isdeductible.
Ideally, you should keep track of how much time you use your home internet connection for business and howmuch time for personal use. A simple log or notation on your business calendar or appointment book—indicatingapproximately how many hours you were online for business each day while working at home—should besufficient.
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 suchas that permitted for tracking business use of vehicles and other listed property.
There is no logical reason the IRSshouldn’t accept such a sampling for internet use.
To learn more about the sample method, see Q&A: IRS Auditor Doesn’t Know the 90-Day Mileage Log Rule
Making an Estimate and Relying on the Cohan Rule
Since home internet connection costs are relatively small—usually no more than $1,000-$2,000 per year—evenminimal recordkeeping is too much trouble for many taxpayers. Instead, they estimate the percentage of the timethey use their home internet for business.
Estimating your internet expenses can work.
Under the Cohan rule, in some cases, courts may accept a reasonable estimate of a business expense where thetaxpayer does not have adequate records.
The Cohan rule may not be used for travel, vehicle and other listed property, meal, lodging, and gift expenses, forwhich strict substantiation is required.
But since internet expenses are characterized as utility expenses, theCohan rule can be used to estimate them.
The Cohan rule may be applied not only by the Tax Court, but also by IRS auditors and agents as well. If you areundergoing an IRS correspondence examination, you may have to go through the appeals process or even file apetition in Tax Court to get any consideration under the Cohan rule.
Be aware that application of the Cohan rule is discretionary. Neither the courts nor the IRS is required to employthe rule to grant you a deduction for which you don’t have adequate records.
And even when they do apply theCohan rule, courts and the IRS auditors tend to lowball the amount of the deductible expense because yourinexactitude is of your own making.
Two Requirements
For the Cohan rule to apply, you must satisfy two requirements:
1. You must convince the court or the IRS that you actually incurred the expense.
2. There must be a reasonable basis for making an estimate of the expense.
You should have no problem proving requirement number 1: your internet bill is proof you actually incurred theexpense involved.
Requirement number 2 is where you can trip up. You must give the court or the IRS some reasonable basis toestimate what percentage of your total home internet bill was for business. You can’t just make a wild ballparkguess.
Credible Testimony
Credible testimony is a common way to convince the IRS or the Tax Court to accept your estimate.
For example, Robert G. Franklin, a loan officer, maintained a home office, which he used primarily in the morningsand evenings. The Tax Court found that he presented credible testimony that his home internet service wasprimarily for business and that any personal use was incidental.
Such testimony included the fact that he emailed a daily marketing update to several hundred real estate agents,past customers, and borrowers. The court applied the Cohan rule and held that Franklin could deduct $377 of his$499 annual home internet bill.
On the other hand, in one example, husband and wife college professors were not allowed to deduct any portion oftheir $2,757 annual home internet expense. The couple testified credibly that they used their home internet serviceto conduct academic research.
But they provided no evidence, by testimony or otherwise, as to what percentage of internet use was for businesspurposes. The court refused to make its own estimate under the Cohan rule, because it would be “whollyarbitrary.”
Reasonable Basis
The moral of the story, as shown in these cases, is that you need to give an IRS auditor or the court somereasonable basis to estimate how much you use your home internet for business. This could include testimonyabout the type of work you do at home; copies of emails you send and receive; videoconferencing records;appointment books or calendars showing the work you do at home; or any other evidence that you use your homeinternet for business, not pleasure.
Gather this information and use it to make your own estimate of your deductible home internet expenses when youprepare your tax return. This will go a long way to helping the IRS or the court use the Cohan rule.
Takeaways
The entity you choose for your business operation determines the strategy you need to use to deduct your homeinternet expenses. For example, if you operate as a Schedule C taxpayer, you can deduct your use of your homeinternet 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 online 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 corporationreimburse 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 geta 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 versuspersonal use. You can use a sampling method to reduce this record-keeping burden. Also, you can lighten the loadwith an internet-use tracking app.
If you lack adequate records of your home internet use, the IRS and the Tax Court may accept a reasonableestimate under the Cohan rule. But there must be some reasonable basis for the estimate, such as recordsshowing the type of work you do at home. And even with this, both the IRS and the court will lower your deductionbecause you failed to keep the records.