Paying for a home Internet connection is expensive—usually at least $50 or more per month--depending on where you live and the speed of your connection. Fortunately, if you work at home, at least part of the expense is deductible.
An Internet connection fee is a deductible business expense provided that it is an ordinary and necessary item for your business. Today, an Internet connection is as vital for most businesses as electricity and is therefore both “ordinary and necessary” and normally deductible.
If you’re self-employed, the expense is fully deductible. If you're an employee in someone else's business, it's deductible only to the extent that you are not reimbursed for the cost by your employer. Such an unreimbursed employee expense is a miscellaneous itemized deduction that you may deduct only if, and to the extent, that it, along with your other miscellaneous itemized deductions (if any), exceed 2% of your adjusted gross income.
However, the deduction for Internet connection fees can get a little complicated because most people use their home Internet connection for both personal and business use. When you use a service or asset for both business and personal purposes, you can only deduct an amount equal to your business use percentage. You’re supposed to keep track of how much you use the item for business and personal purposes.
In the case of what the IRS calls “listed property,” you are required to satisfy especially onerous documentation requirements. Listed property consists of items that can easily be used for personal as well as business purposes--for example, cars, computers not used exclusively at a business location, cell phones, cameras, stereos, camcorders and other entertainment property. The IRS fears that taxpayers might use listed property for personal reasons but claim a business deduction for it. For this reason, you’re required to document your business use of listed property—for example, by keeping a logbook showing when and how the property is used. If you fail to keep the required documentation, you get no deduction at all for the item, even though it is clear that you did in fact use it at least part of the time for your business.
Fortunately, the tax court has held that an Internet connection does not constitute listed property and is not subject to the strict substantiation requirements for such property. Instead, an Internet connection is treated like any other utility, such as heat, water, or electricity, none of which are subject to the listed property rules.
Thus, you need not keep a detailed log of your home Internet usage. But you still need to be able to provide credible evidence of how much you used your Internet connection for business versus personal use. This can consist of your oral testimony, and/or any documentary evidence that can help show your Internet usage—for example, copies of all the business-related emails you’ve sent and received during a typical time period, or a few notations you made on your calendar.
Take, for example, a public relations professional who worked out of her Manhattan apartment and paid $640 per year for her Internet connection. The IRS denied the deduction because she lacked detailed documentation showing how much she used the connection for her PR business. The tax court reversed the IRS, pointing out that such documentation is not absolutely required. Although she did not offer a log or other record of her Internet use, the court said that she testified credibly that about 70% of her use was business related. As a result, she was entitled to a deduction of $442 (70% of $650). (Miller v. Comm’r, T.C. Summary Opinion 2014-74.)
On the other hand, two college professors who used their home Internet connection for their research were denied any deduction at all by the tax court. Although they testified credibly that they used their home Internet service for research, the tax court said they provided no evidence, testimonial or otherwise, about the percentage of time they used their connection for business versus personal purposes. The court said that “any estimate we might make regarding the deductible portion of the expense would be wholly arbitrary” and constitute “unguided largesse.” (Noz v. Comm’r, 2012 TC Memo 2012-212.)