Can You Deduct Internet as a Business Expense?

Many individuals operating a business, whether full-time or as a side venture, often wonder about the deductibility of common household expenses. Understanding which costs can reduce taxable income is an important part of managing business finances effectively. Internet service, a necessity in today’s digital landscape, frequently falls into this category of potentially deductible expenses for business owners. Internet costs can be deducted if certain conditions are met and the expense is directly tied to business operations.

Qualifying for the Deduction

To qualify as a deductible business expense, an internet cost must meet the Internal Revenue Service (IRS) criteria of being both “ordinary and necessary.” An ordinary expense is common and accepted in your specific trade or business, typically incurred in response to a business circumstance rather than being habitual. A necessary expense is helpful and appropriate for your business; it does not have to be indispensable, but should contribute to its development and maintenance. For most modern businesses, internet access is considered both ordinary and necessary due to its role in communication, research, and online operations.

The qualification for this deduction largely depends on your employment status. Self-employed individuals, freelancers, and small business owners typically can deduct a portion of their internet bill. This is because these individuals are responsible for their own business expenses. In contrast, W-2 employees generally cannot deduct unreimbursed employee business expenses, including internet costs, as this deduction has been suspended through 2025. If an employer requires internet use for work, an employee might seek reimbursement from the employer instead.

Distinguishing between dedicated business internet lines and shared home internet connections is important. If you have an internet service solely for your business, 100% of that bill can be deductible. However, many self-employed individuals use a single internet connection for both business and personal purposes. In such cases, only the portion of the internet usage directly attributable to business activities is deductible, while personal use is not. This requires careful allocation between business and personal use to determine the deductible amount.

Calculating the Deductible Amount

When an internet connection serves both business and personal needs, calculating the business-use percentage determines the deductible amount. This percentage represents the portion of the total internet expense that is legitimately for business purposes. There are several reasonable methods to arrive at this figure, and the chosen method should accurately reflect the actual business usage.

One common method involves logging the hours spent on business-related internet activities over a representative period, such as a continuous four-week period. For example, if you use the internet for work 160 hours in a month that has 744 total hours, your business-use percentage would be approximately 21.5% (160/744). This percentage can then be applied to your monthly internet bill. Another approach is to evaluate the percentage of time the internet is used for specific business activities, such as answering client emails, participating in video conferences, or managing a business website.

While the IRS does not specify a single calculation method, it emphasizes that the allocation must be reasonable and defensible upon review. For instance, if you estimate that 60% of your internet usage is for business, you could claim 60% of your internet expenses. However, avoid claiming an unreasonable percentage, as this could draw unwanted attention from tax authorities. Consistency in the chosen method across tax periods is also advised.

Maintaining Proper Records

Proper record-keeping is fundamental for substantiating any business expense deduction, including internet costs. The IRS requires taxpayers to maintain adequate records that can establish the elements of each business expense. For internet expenses, this includes keeping documentation of the total cost and the method used to determine the business-use percentage.

Essential records to retain include internet service provider bills, invoices, and any contracts related to your internet service. These documents provide proof of the expense amount and payment. Additionally, any logs, diaries, or other documentation used to calculate your business-use percentage must be kept. For instance, a simple log or notation in a calendar indicating the approximate hours of business internet use each day can be sufficient.

These records are important for audit purposes, as they provide the necessary evidence to support your deduction. Generally, the IRS recommends keeping business records for at least three years from the date you filed your tax return or its due date, whichever is later. While this is a general guideline, it is prudent to retain records for up to six years, as the IRS can audit returns within that timeframe if there is a substantial understatement of income. Organizing these documents systematically, perhaps by year and expense type, can simplify retrieval if needed.

Reporting the Deduction

Once you have accurately calculated the deductible amount of your internet expense and gathered the necessary documentation, the next step involves reporting it correctly on your tax forms. For self-employed individuals and sole proprietors, the most common method is to report this expense on Schedule C (Form 1040), Profit or Loss From Business. This form is used to report income and expenses from a business operated as a sole proprietorship.

On Schedule C, the business portion of your internet expenses is typically entered on Line 25, which is designated for “Utilities.” It is important to note that this is the appropriate line if you are not also claiming a home office deduction using Form 8829. If you are claiming a home office deduction and the internet expense is shared with the rest of your home, it might be reported as a utility on Form 8829, line 21, as an indirect expense. However, reporting it directly on Schedule C under utilities is often a straightforward approach, especially if a formal home office deduction is not being taken.