section 280a and internet expense

[morrisliberty]

Hello,


If i am self-employed and qualify my home office under Section 280a can I deduct business use of my internet costs, if so where and how? Pub 535 says internet related expenses are deductible business expenses , however are they office expenses or utility expenses? I believe they are considered utility expenses and business use portion can be deducted on Form 8829 Business use of home and are limited under Section 280[c][5]. Thank you for any comments.

[mwcpa]

from IRS publication 587

"Utilities and Services
Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. However, if you use part of your home for business, you can deduct the business part of these expenses. Generally, the business percentage for utilities is the same as the percentage of your home used for business.

Telephone. The basic local telephone service charge, including taxes, for the first telephone line into your home (i.e., landline) is a nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Do not include these expenses as a cost of using your home for business. Deduct these charges separately on the appropriate form or schedule. For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities (instead of line 30, Expenses for business use of your home). "

In my opinion, internet costs should be treated as telephone in the example above from publication 587.

In any apportionment of business versus personal expense, you need to be reasonable.

[morrisliberty]

hello,


I agree internet related expenses are classified as utility expenses but are they subject to section 280a[c][ 5] or are they they treated like telephone expenses on Schedule C?
I cannot not find anything in irs materials but I did find this case Charles A Brown Jr and Linda L Brown T C summary Opinion 2005-85 Footnote 5 If the remaining amount of the utility expenses were properly substantiated and thus allowable, the deduction for those expenses would habe been limited by section 280A[c][5] not to exceed the excess of the gross income" derived from such use" of the home office in the trade or business, reduced by other expenses of the trade or business.

[mwcpa]

Please read the telephone example in the IRS publication and change the word telephone to internet..... then apply that logic....

If the internet access is used by a home desk top computer and that computer is less then 100% business the home office may not qualify, and the internet cost is now a moot point.

Internet service is becoming more and more of a basic must have utility for every household. Therefore, if the internet access is a "basic" service for use by the entire household it is probably NOT deductible..... but if internet service is used exclusively by the business then it is 100% deductible....

So, for the home office, if the only internet hook up is in the home office and the home office qualifies as a home office (that means the computer in that office is 100% business and is not used to check personal e-mail, handle personal finances, etc) then the internet should be 100% deductible on the schedule C as a utility expense. But, if that single access is used for 1 second for any other use, the internet costs and probably the entire home office is not allowable.

Just think of those single computer homes were someone claims a home office deduction, but desk top computer in the home office is 50% business and 50% personal.... do you really think you have a qualified home office now?

[morrisliberty]

hello,

Thank you . When I read your explanation I understand the situation . I have another question from Small Business Quickfinder Handbook 2006.

Problem: Dealing with home office expenses where the corporate office is in the employee's principal residence.

Applicable Rules;

1.} An employee cannot deduct home office expenses if the business use of the home is attibutable to rent paid by the employer . section 280A[c][5]

2.} This rule does not prevent the deduction of mortgage interest and real estate taxes on Schedule A . Section 280A


3.} The employer may deduct rent paid to an employee for use of the employee's home even though the employee is not allowed a corresponding deduction Section 162[3]


Solution: Have the employer reimburse the employee for expenses directly related to the home office[repairs and supplies] and allocated expenses [ utilities and insurance]. The employee is not reimbursed for depreciation, interest, or taxes.The arrangement will qualify as a "working condition fringe"if;

The payments are for expenditures that would be deductible as business expenses by the employee if he or she paid them.

The employee verifies to the employer that the payments were actually used for such expenses and

Any amounts not used are returned to the employer {Reg 1.132-5[1][v]

IN THE SCENARIO ABOVE , THE REIMBURSEMENTS ARE TAX FREE TO EMPLOYEE AS WORKING CONDITION FRINGE.


Is this reimbursement plan kosher ? In other words would it pass muster with the IRS and Courts? It seems you would need a lot of documentation for your expenses? Is it worth it ?

At the bottom of article ; Caution there is little case law or other authoritative guidance giving specific approval to the reimbursement plan presented above.

[mwcpa]

"Is this reimbursement plan kosher ?" Yes
"In other words would it pass muster with the IRS and Courts?" If the facts and circumstances supported the claim, yes, it should
"It seems you would need a lot of documentation for your expenses?" yes, very very detailed reporting and support would be required to "prove" indirect costs like utilities, insurance, etc. direct costs, like office supplies, are a little easier to substantiate.
"Is it worth it ?" that depends on the person... in my opinion, spending an hour to save a couple of dollars in tax may not be worth the time.... but I am often approached by people who want to save tax at any cost.... I never find it smart to spend $3,000 (or $300) to save $2,000 (or $200) in tax....

I do hope you have more current literature in your library given your statement "I have another question from Small Business Quickfinder Handbook 2006".... for 2010 and 2011 much of the data in the publication may be dated and if you are a paid preparer that could lead to trouble (like malpractice)....