Decision — Substantiation and the Internet

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Black and white picture of computer with internet iconImage source: openclipart.org

You’re expected to maintain records for your business deductions. The term used in the tax code is “substantiation”, and it means you need to support your deductions with proof.

Generally, substantiation is simple—a receipt, bill, or cancelled check. But some deductions require more proof than others. Listed property is one example, and listed property includes a common business asset: Your computer, when you use it somewhere other than your regular place of business, such as when you take a laptop with you to a client’s office. In that situation, you may need to provide a log of your business use to claim a deduction for the laptop.

On the other hand, another common business expense—the fees you pay for service to connect your computer to the internet—is considered utilities, and is not subject to the stricter substantiation rules. That’s not to say you can always claim 100% of internet expenses, however. You can deduct the cost of home internet service if the expense is ordinary and necessary in your trade or business. To the extent the expense is attributable to nonbusiness use, it constitutes a nondeductible personal expense.

In T.C. Memo. 2012-272 (Noz), the IRS disallowed a deduction for internet expenses. The IRS said the expenses were not ordinary and necessary for the taxpayer, a medical researcher. In addition, the IRS said the taxpayer did not adhere to the listed property substantiation rules.

The court sided with the taxpayer, saying the internet expense attributable to business use was deductible, and the listed property substantiation rules did not apply. However, the taxpayer provided no evidence regarding the percentage of internet use for business purposes versus personal purposes. Therefore, the court was unable estimate the business portion of internet use, and the taxpayer was not entitled to a deduction for any of the cost.

Taxing Lesson: Just because something is simple does not mean it is unimportant.

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