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.
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Abacoa CPA’s
Jupiter, FL