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Can I deduct internet expenses?

Article ID: 141
Last updated: 30 Oct, 2012
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By Jason Watson ()

Yes. Here is a snippet from a 2012 Tax Court Memo 2012-272-

A taxpayer may deduct the cost of home internet service pursuant to section 162 if the expense is ordinary and necessary in the taxpayer’s trade or business.  See Fessey v. Commissioner, T.C. Memo. 2010-191, slip op. at 13. To the extent that the taxpayer’s home internet expense is attributable to nonbusiness use, it constitutes a nondeductible personal expense. See sec. 262(a); Fessey v. Commissioner, slip op. at 13. Contrary to the contention of the IRS, home internet expenses are not subject to the strict substantiation rules of section 274(d). See Bogue v. Commissioner, T.C. Memo. 2011-164, slip op. at 41 (strict substantiation does not apply to utility expenses, such as home internet service); Alami v. Commissioner, T.C. Memo. 2009-42, slip op. at 26 (same).

In the past the Court has considered internet expenses to be a utility such as a telephone or electricity. This subsequently allowed the IRS to contend that a taxpayer would need a telephone regardless, and therefore the deduction as a business expense was routinely denied.

Taxpayers have relief for deducting utilities (except water) under the home office deduction. However, the home office deduction will not help those who work from home occasionally and have another office location. The IRS states that if a taxpayer performs substantial managerial activities at a location outside of their home, the home office deduction does not qualify. Subsequently utilities are not deductible. Bummer.

According to court documents in this 2012 tax case the IRS originally denied the home internet expense deduction because it was a utility, and the taxpayer was not claiming a home office deduction. To deduct a business expense a taxpayer must prove the amount and the business purpose. Since identifying and detailing the business purpose of each moment a taxpayer used his or her home internet is akin to nailing Jello to a wall, the IRS said No. The IRS was half-right.

The IRS was also half-wrong since the Tax Court in 2009 stated that utility expenses including home internet service does not require a taxpayer to connect each moment of internet use to a business purpose. Further, this 2012 Court reminded the IRS that the taxpayer only needs to prove a percentage of use associated with a business purpose. On the contrary, if a taxpayer claims a deduction for a business meal, he or she would need to prove the specific business connection for that single purchase. Not internet expenses.

See, even the IRS gets in trouble with the Tax Court once in a while. Not as often as most taxpayers would like of course.

As with cell phones, you still need to prove how much of your internet expenses were personal, and how much were associated with your job or business.

We also invite you to read our Cell Phones, Tablets and Internet Tax Article at www.watsoncpagroup.com/CellPhone.pdf.

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