Deducting Home Internet Expenses as Employee Expenses

Jupiter is home to many small business owners who also work at home or operate entirely from their home.  A recent court case came up that would be beneficial for most business owners to know about.  

Under IRC Sec.162(a), a deduction is allowed for ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. However, a deduction normally is not available for personal, living, or family expenses [IRC Sec. 262(a)]. The facts must be considered in determining whether an expenditure is deductible under IRC Sec.162.

Facts. The taxpayer, a self-employed financial advisor, begins each workday morning from home watching television programs devoted to financial news and making phone calls to business associated on the East Coast. He then either commutes to an office near Santa Clarita, California or drives to meet with clients around Southern California. He paid Time Warner approximate monthly fees for telephone service ($14), Internet service ($53) and cable television ($43) for his residence. On his Schedule C(tax return for business) for the year at issue, the taxpayer deducted “other” expenses of $1,371 for telephone, cable television, and Internet charges.

Taxpayer and IRS Position. The taxpayer maintained that he used the: (1) telephone line exclusively to send and receive facsimile transmissions related to his business and (2) Internet service approximately 75% of the time for his business (for example, to send and receive emails). He argued that he should be able to deduct a portion of the total charge. He conceded that he was not entitled to a deduction for the cable television service. The IRS disallowed all the Time Warner deductions as nondeductible personal expense.

Court Decision. IRC Sec. 262(b) provides that the first telephone line in any residence shall be treated as a personal expense. The taxpayer did not show that the telephone charge was for anything other than basic service, so the Tax Court did not allow a deduction. However, the Tax Court allowed the taxpayer to deduct

$477 ($53 per month × 12 × 75%) of the amount paid for Internet services. The Tax Court characterized the Internet access expenses as utility expenses to which the strict substantiation under IRC Sec. 274(d) does not apply and allowed the taxpayer’s estimate of the deductible expenses based on reasonable evidence.

This is something to think about for all of those who have businesses at home or even work from home.  

Call us for your tax prep or bookkeeping needs. 

Abacoa CPA’s

Jupiter, FL 

Reminder: Report of Foreign Bank and Financial Accounts Is Due 6/30/15

Many of my clients have Foreign Bank Accounts.  In Jupiter and South Florida they are quite common.  What most people do not know is that the IRS and government require you to fill out a form to tell them how much you have.  The penalties are stiff if you do not get the forms in on time.  Here is general information on how the process works. 

A taxpayer with a financial interest in or signature authority over a foreign financial account exceeding certain thresholds may be required to report the account yearly by filing a Financial Crimes Enforcement Network (FinCEN) Form 114, [Report of Foreign Bank and Financial Accounts (FBAR)]. Specifically, for 2014, Form 114 is required to be filed during the year if—

 1. a taxpayer has a financial interest in or signature authority over at least one financial account (which can be anything from a securities, brokerage, mutual fund, savings, demand, checking, deposit or time deposit account to a commodity futures or options, and a whole life insurance or a cash value annuity policy) located outside the U.S., and

2. the aggregate value of all such foreign financial accounts exceeded $10,000 at any time during 2014.

The 2014 Form 114 must be filed by 6/30/15 and cannot be extended. It must be filed electronically through bsaefiling.fincen.treas.gov. The penalty for failing to file Form 114 is substantial—up to $10,000 per violation (or the greater of $100,000 or 50% of the balance in an account if the failure is willful).

FinCEN Form 114 is not required if: (1) the aggregate value of all foreign accounts is $10,000 or less at all times during the year or (2) the accounts are at a U.S. military banking facility. Also, the FBAR is filed on a separate return basis (that is, joint filings are not allowed). However, a spouse who has only a financial interest in a joint account that is reported on the other spouse’s FBAR does not have to file a separate FBAR.

 

Abacoa CPA's

Jupiter, FL

(561) 331-0744