With more and more businesses operating online, many entrepreneurs wonder how much of their Internet use can be written off as a business expense on their taxes. The answer depends on how you use the Internet and what percentage is for business versus personal reasons. In this article, we’ll look at what Internet expenses are potentially tax-deductible and how to determine what portion of your Internet use is for business.
What Internet Expenses are Potentially Tax-Deductible?
If you run your business from home, either full-time or in addition to an outside office, you may be able to deduct a portion of your Internet and mobile data plan on your taxes. Deductible expenses may include:
- Monthly Internet subscription fees
- Cost of Internet equipment and routers
- Website hosting fees
- Domain name registration
- Webpage design and maintenance
- Email hosting and addresses
- Cloud computing and storage services
- Online software subscriptions and apps
- Social media management tools
- Online advertising costs
- Mobile data plans used for business
To claim these business deductions, you must be able to show that the expenses are “ordinary and necessary” parts of operating your business. This means the Internet use needs to be directly related to your core business activities.
How to Determine the Tax-Deductible Portion
Since most entrepreneurs don’t use the Internet solely for business, you will need to prorate your expenses based on the percentage that is business-related. There are a couple approaches the IRS allows:
- Actual use method – Track how much time you actually spend on the Internet for business vs. personal reasons each month. Calculate the percentage of time used for business activities.
- Business vs. total use method – Identify all of your devices that use the Internet (computers, phones, tablets). Determine what percentage of total use for each device is for business vs. personal. Average the percentages across devices.
Let’s look at some examples to illustrate these methods.
Actual Use Method
Jen owns a shop on Etsy where she sells handmade jewelry and other crafts. She works from home and uses the same computer and Internet connection for her Etsy business and personal use. Jen tracks how much time she spends on the Internet each day for the month of March and finds:
Use | Hours |
---|---|
Etsy shop management | 45 |
Social media marketing | 10 |
Researching new craft trends | 5 |
Total business use | 60 hours |
Personal browsing | 40 |
Total use | 100 hours |
Jen used the Internet for business purposes 60% of the time. So for the $50 monthly Internet bill, she can deduct 60% or $30 as a business expense.
Business vs. Total Use Method
Charlie is an architect who works from a home office 3 days per week and the remaining 2 days from his firm’s office downtown. He uses the Internet from both locations to design buildings, email clients, manage invoices, and run the business side of his practice.
Charlie has the following devices:
Device | % for Business |
---|---|
Desktop (home office) | 90% |
Laptop (home and office) | 100% |
Smartphone | 75% |
To determine the deductible percentage, Charlie averages the business use of each device: (90% + 100% + 75%) / 3 = 88%.
For Charlie’s $150 monthly Internet and data bill, he can deduct 88% or $132 as a business expense.
Records Needed to Prove Deductions
To claim these home office deductions on your taxes, you need to keep accurate monthly records that can document how you came up with the business use percentage. The IRS may request to see this documentation if you are audited.
Records should include:
- Bills and invoices for Internet, cell phone, computer equipment, etc.
- Log tracking time spent on business activities online
- List of all devices used for Internet and how much each is used for business
Having detailed records makes calculating the percentages easy and helps prove the validity of your home office deductions.
Limitations to Be Aware Of
While you can deduct a portion of your Internet expenses related to your home office, there are some potential limitations:
- You must itemize deductions on Schedule C to claim home office deductions
- Home office deductions in total cannot exceed your net business income
- Higher deductions may trigger an audit, especially if percentages seem excessive
- Using the actual use method limits deductions to just the business portion of shared expenses (like Internet)
- The business use % of a home office cannot exceed the size of the office as a percent of total home size
It’s also important to follow the IRS safe harbor rules for claiming a home office – which generally require it to be used regularly and exclusively for business purposes.
Maximizing Your Potential Internet Deductions
To maximize the amount of your Internet costs that can be deducted as a business expense, follow these tips:
- Set up a separate Internet connection used only for your home office if feasible. Then 100% could be deductible.
- Use a login name and password for your business only. Don’t share with other household members.
- Automate records with time tracking tools that log how long you spend on various websites and applications.
- Conduct video calls, conferences, and meetings over the Internet from your home office.
- Use cloud document storage for all business files so you can access them from home.
- Block distracting websites like social media when working from your home office.
- Upgrade to higher speed Internet if needed to conduct your business effectively.
- Purchase a cellular data plan for your business to separate from personal mobile usage.
- Dedicate mobile devices like tablets solely for business purposes.
Taking these steps helps build a stronger case that your Internet use from home is essential for business operations.
Conclusion
Running an online business or having a home office allows entrepreneurs to deduct a portion of their Internet expenses on their taxes. While not the full amount is deductible, claiming these deductions can still yield significant tax savings each year.
Be sure to keep detailed records that can prove what percentage of your Internet usage, equipment, and mobile plans are for conducting business. The key is separating and tracking business vs. personal use as much as possible. Limitations may apply, but with good documentation, most entrepreneurs who work from home can deduct their fair share of Internet costs as a business expense.