How should home office internet expense be calculated for tax deduction purposes?

by Nicole T. Buckman, CPA | Mar 05, 2019
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I've seen two ways to calculate the internet expense for a home office of someone who is self-employed and uses internet for business and personal use. Should the home office internet expense be calculated using percentage of time or percentage of home office space? I have seen two ways given as answers. The first method is to multiply internet bills by the percentage of home office space, similar to home office utilities, when taking the standard home office deduction. The second method is to multiply internet bills by the percentage of time used for business. Using the methods above, there is a large difference between deducting the former and the latter. Which method is correct for a self-employed person with home office internet?

There are two methods to consider when determining your home office deduction: the simplified method and the regular method. 

A taxpayer may elect a simplified safe harbor method to compute the home office deduction without having to substantiate, calculate, and allocate deductible home office expenses. Under the safe harbor, the deduction is equal to $5 times the number of square feet of the home office, up to a maximum of 300 square feet (maximum deduction of $1,500). This deduction cannot exceed the taxpayer’s gross income from the business. A taxpayer who uses safe harbor cannot deduct actual home office expenses, though business expenses unrelated to the use of the home may still be deducted.

A taxpayer using the regular method (required for tax years 2012 and prior) determines the actual expenses of the home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Under this method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage (square footage) of your home devoted to your business activities.

There are four types of business expense related to the home office deduction:

  • Business expenses (direct expenses)
  • Home expenses that would be deductible even if the home was not used as a place of business (mortgage interest)
  • Household expenses that are allocable to the business (utilities and insurance)
  • Allocable depreciation

Home internet expenses would fall under “household expenses that are allocable to the business.” Therefore, you can elect the simplified method and take $5/square foot or total your internet bill for 2018 and allocate a percentage of square footage used for business.

A CPA can assist you to ensure you are maximizing your deductions.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Nicole T. Buckman, CPA, is with Kohanski & Company PC in Moosic, Pa.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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