The Internal Revenue Service sets the rules for expenses you can deduct from your income for tax purposes. If you are using the Internet to work, run a business or otherwise generate income, you may be able to deduct the cost. It's important to keep records, as the IRS allows you only to deduct an expense actually related to your business.
The IRS allows a wide range of tax deductions for business-related expenses. Anyone generating income by using the Internet is a candidate for a business-related deduction. This includes companies or individuals paying for Internet service, creating and registering a Web page, or hiring webmasters or consultants.
If you are an individual working from home, or self-employed, you may be using the Internet to earn money or keep in touch with supervisors, employees or clients. Only that part of your Internet use related to earning income is deductible; for most people, however, the Internet is useful both for professional and personal connections. For this reason, you must attribute the percentage of time you're using the Internet for professional reasons. If you are on the Internet 50 percent of the time to earn money, then only 50 percent of the costs (such as monthly broadband charges) are tax-deductible.
You will also incur business-related costs if you create a website and register a domain name for the purpose of generating sales and earning money. These costs are fully deductible; the IRS, however, may require a new business to amortize the expense as a start-up cost over a period of years. Other Internet costs may include voice over Internet phone service, online security or storage system charges, consulting fees, and sales commissions you may pay as an affiliate or third-party seller on a website such as Amazon or eBay.
The 2 Percent Rule
In order to deduct Internet expenses as an employee, you must file Form 2106, Employee-Related Expenses. The IRS limits your deduction to that amount exceeding 2 percent of your adjusted gross income. Thus, if you earn $50,000, you can only deduct the expenses that exceed $1,000. If you are self-employed, or a business owner, then your entire business-related Internet costs are deductible from your business gross income.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.