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Taxpayer asks:

My question is about how to file taxes for my work. Since I’m writing a TV show blog, can I deduct my cable bills? How about my internet?

Taxgirl says:

Ahh, deductions, the most mysterious of tax form entries. What’s deductible? What’s not? A lot of what can be deducted is very fact-specific, based on what you do. Let me start out with some basics.

The official definition of a deductible expense according to IRS is that “a business expense must be both ordinary and necessary.” An ordinary expense is defined as one that is “common and accepted in your trade or business.” A necessary expense is defined as one that is “helpful and appropriate for your trade or business.” So far, I would argue that your expenses would likely qualify on both counts.

However, I’m guessing that you don’t have cable and internet which you use solely for business purposes. You probably catch the nightly news or send a friendly email using both cable and internet. If you’re mixing business and personal use, you must divide the total cost between the two based on your usage. You can only deduct as a business expense the piece attributable to business, so if you use your cable 75% for business, then you can deduct 75% of the cost. This rule also applies to the use of your car, home, and utilities – but not your actual home telephone line, which the IRS considers routinely personal, though you can deduct the cost of a dedicated second line or cell phone.

Since you likely use part of your home for business, you may be able to deduct expenses for the business use of your home. To qualify, you must use the part of your home attributable to business “exclusively and regularly for your trade or business” and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business. In other words, to be deductible, your home office must be your actual office and not just at your home for convenience. If you use part of your home as a workspace, it must be exclusively workspace – you can’t write off your kitchen table space just because you use your laptop there or your sofa since you occasionally catch up on TV for your blog there. It must be space that is solely used for business.

As with certain other business expenses, you figure your home office deduction by pro-rating the use. Figure the amount of space attributable to your business compared with the total. For example, if your home office space is 200 sq ft and your home is 2000 sq ft, you would claim 10% of your home-related expenses (insurance, taxes, mortgage interest, etc.) as a home office deduction. You report the home office deduction on federal form 8829 (Expenses for Business Use of Your Home), which is filed along with your Schedule C (Profit or Loss From Your Business) on your personal 1040. For more info on home office expenses, check out IRS Publication 587.

A quick word of warning: in some localities, such as Philadelphia, claiming the home office deduction may subject you to additional local taxes – check with your tax professional if you’re not sure. Additionally, you may lose the ability to claim the full capital gains exemption on the sale of your home if you claim the home office deduction.

Other expenses that you might be able to deduct would include web hosting and development expenses (if you pay your own way); the cost of a domain name; back-up tapes or server costs and the like. You may also be able to deduct unreimbursed travel, entertainment, and automobile expenses. I’ll include more information about those in a future post.

Of course, all of this assumes that you’re participating in a business and not a hobby. If the IRS considers your writing a hobby and not a business, you may only deduct expenses to the extent that you report income; there is no carry-forward. Generally, to be considered a business, you need to hold yourself out as a business and you need to perform activities associated with the business with the expectation of making a profit (you don’t have to actually make a profit every year, just expect to make a profit). In other words, that doll-making business that you do “on the side” for fun – and possibly blogging, depending on how often you blog and how serious you are about it – may be viewed by IRS as a hobby. If that happens, your deduction for expenses is limited to the total amount of income associated with the activity. For example, if you calculate $3500 in expenses associated with your blogging hobby and you collect $500 in revenue, your deduction is limited to $500. In contrast, if your expenses exceed your income for your business, you can carry forward the excess as a loss. This makes sense since you anticipate making a profit next year, right?

The bottom line is that if you are operating a business, you should be able to deduct expenses associated with that business. But be reasonable. Remember: pigs get fat, hogs get slaughtered.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.