One of the surest ways to avoid a tax audit from your friendly U.S. Internal Revenue Service (IRS) agent is to file accurate and timely returns. If you have a list of deductions, however, then accurate and timely filing may present a challenge. Fortunately, identifying the correct place for your Internet expenses in the federal return is not a difficult process, though it may take some consideration to ensure accuracy. When in doubt, a trusted tax professional can help you tease out which category makes the most sense given your business.
IRS: Expenses and Utilities
Office expenses and office utilities are both deductible expenses on a federal tax return. Though the categories are often recognized as similar buckets, office expenses and utilities are entirely separate and should be utilized accordingly.
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The IRS views office expenses as general products and inventory used to support the business' operations. Office expenses include items as simple as paper, pens and printer ink. These expenses can also include landscaping and snow removal, as well as coffee and toilet paper if the items are regularly available to the customers.
Consider also: How Do Tax Deductions Work?
Home Office Internet Claim: Utilities
According to Oracle NetSuite, Internet expenses are often classified as utilities. Unlike office expenses, office utilities are required for the business' operations and include items such as electric, gas and telephone services. If the business utilizes the Internet regularly to service its customers and is unable to complete the servicing without the Internet, the Internet is defined as an office utility.
Internet services that are simply supporting services for the business, and not mandatory for efficient operations, are considered to be office expenses. For instance, if you operate a daycare where parents pay by check or cash and your students do not use the Internet, then it is probably not mandatory for your operations.
Consider also: 6 Surprising Tax Deductions for Freelancers
IRS Home Office Internet Deduction
If your business conducts its operations as a free-standing business, it is likely that the business' office utilities and expenses will carry 100 percent of the applicable deduction. However, if the business is operating partially or completely from the home, or if you telecommute for your employer, the applicable internet expenses may not qualify for 100 percent of the deduction.
To determine the percentage, you must identify the total amount of time the internet service is used for your business' operations, compared to the time the service is used for other purposes. Be prepared to document this, in case documentation is needed at a later date.
Deduction Percentage Basics
If you have a home office with separate Internet designated strictly for the home business operations, you can carry 100 percent deduction for the internet expense. However, if the Internet service is not designated exclusively for the business, the expense qualifies only for a percentage of the applicable deduction.
The Corporate Finance Institute reports that in order to identify that percentage, you must first determine how much of your home's space is used for business. Identify the square footage of the work area that is designated for business use and divide the measurement by the total square footage of the home. The resulting percentage identifies the total percentage of the home that is used for business, as well as the percentage of the overall Internet expenses that qualify for the tax deduction.
Consider also: Self-Employed Tax Deductions, Benefits & More