Tracking COVID caused business expense for next year

[TheSeal]

Thankfully I filed for this year right before lockdown started. I have questions to help me track some unusual expenses for next year. 

My business is an S-corp. My home is my office. I am a trainer who is usually a road warrior. I was on the road so much that I did not have internet in my home. Using my phone as a hotspot was enough. The current situation has driven all my training online. Because of that I had to buy some equipment (e.g. cable modem and Ethernet to USB connector for my system) additionally I now have a monthly internet bill. I feel OK deducting the equipment as a normal office expense. What about the internet bill? I would not have that without a business need. Can I deduct it as a business expense? If so, what box does it go in?  Thanks for the advice.

[Critter]

I highly recommend you  get local professional help to be educated on the filing requirement and rules for an S-corp ... from  the question you posted it  seems to indicate you have already made a few costly errors ...

Just to name a few : 

1) you must file the corp return BEFORE the personal return ... now it will need to be amended

2) you did not pay yourself and issue yourself a W-2

3) the corp return was due 3/15/2020 ... so now it is late and the penalties are piling up unless you put it on extension.  

4) you have a Home office and a vehicle ... neither of which the corp owns ... this requires some extra bookkeeping to address

[TheSeal]

Wow you read an awful lot into my question about a new expense, none of which is accurate.  Thanks for your input.

[Critter]

I have answered thousands of these questions so I have to try to answer based on the limited info posted ... based on my years of experience you seem to need more guidance ... if you will not seek professional assistance then you will need to self educate ... start with the IRS 1120 form instructions :  

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

You could try TT support however they will only be able to assist in program data entry questions not anything related to payroll, bookkeeping or corp regulations.  When you use the BUSINESS program you are pretty much on your own to either know what you need to do or  know how to source the information you need ... read the program screens carefully and all of the blue learn more links.  

ON THE WAGES REQUIREMENT :   

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made.  The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes.  From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes.  Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions .  The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.) 

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.

[jtax]

You can deduct any "ordinary and necessary" expenses incurred for a business reason https://www.law.cornell.edu/uscode/text/26/162

However, "no deduction shall be allowed for personal, living, or family expenses."  https://www.law.cornell.edu/uscode/text/26/262

https://www.irs.gov/publications/p535 says:

Personal Versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

So if you use the internet 100% for work it is all deductible. But you would probably have a hard time proving that (and the burden of proof is on you). The IRS would be suspicious that it was actually a personal expense. 

Some reasonable allocation might be more defensible.

To really know the answer, however, you really need to do more research and see if there are any cases or other guidance. For example, for land lines eventually Congress just made a simple rule that the first phone line was never deductible but the 2nd one could be if used for business. Perhaps there is something similar for Internet. 

[Carl]

Claim y our internet costs as a communiations expense, becuase that's *EXACTLY* what it is for you. There is a caveat though, and it's important you understand this.

If your house where you home office is only has one hard wired telephone line, you can not claim one single penny of your voice telephone bill as a business expense. The IRS says so. You would need to have a separate line with a separate phone number. Then you could claim that 2nd line for the business and claim 100% of the cost of that second line only.

For internet access, you have two options. There must be a physical hardwired network drop in the home office, or there must be a device in that home office that requires internet access and connects wirelessly to the service you pay for. THen you can claim as a business expense, the percentage of the Internet bill that does not exceed the percentage of floor space that you use as your home office. So if you claim 10% of your residence as a home office, the maximum amount of your Internet bill that you can claim as a business expense is 10%.

The other option is to allocate internet access based on the number of residents that live in the house permanently. This includes dependents. So if it's you and your spouse and you have two kids, you can claim a maximum of 25% of your internet bill as a business expense.

These two options apply to all utility expenses that you claim for business use. But understand that in order to claim that utility, it must be physically available in the home office. So if you've converted a bedroom to your home office, I seriously doubt you have running water in that bedroom, or a need for it in that bedroom. So you can't claim any of your water bill as a business expense. Yes, there are exceptions to these. But for the most part any exceptions are so obvious that it's not a problem.

So while home office space is allocated based on percentage of square footage that is business use, your office utility use percentage can be based on either the same, or based on the number of occupants living in the house that utilize those same utilities that the home office does. 

[jtax]

@TheSeal you will also need to follow this discussion to determine if your Internet service deduction depends upon your qualifying for and taking the home office deduction. I was thinking this was a different thing and that your issue would be defending that it the business use %, but it may not be. 

@Carl what if the OP is not claiming the 280A(c) home office deduction at all (a separate thing)? 

Do think that Internet service to a residence is a deduction "with respect to the use of a dwelling" per I.R.C. 280A(a)?  ("no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.) https://www.law.cornell.edu/uscode/text/26/280A

Internet service feels different from electricity or heat or sewer utilities. It doesn't seem like it is with respect to the use of the dwelling Though it feels similar to a phone line, the 1st phone line disallowance is in a different section I.R.C. 262(b). https://www.law.cornell.edu/uscode/text/26/262

Looking quickly at the 280A citations, nothing is really on point. The cases are mostly about whether the home office is exclusively for business use or the is the principal place of business. Not whether a particular expense is "with respect to use" ... however one case might imply that it is expenses that have more a connection with maintaining the home. Browning v. C.I.R, 890 F.2d 1084, 1087 (9th Cir. 1989) ("a taxpayer may not deduct expenses incurred in maintaining his or her home") (emphasis added).

How does Internet service differ from deducting a chair or desk or computer that is used from home but no home office deduction is claimed under 280A(c)?

Do you have any other cases or regulations or guidance on-point?

[Carl]

what if the OP is not claiming the 280A(c) home office deduction at all (a separate thing)?

Why would they not? It's specifically stated, "My home is my office" indicating to me that the home office is their primary place of business.

One thing that just caught my eye is that this is an S-Corp.

When it comes to a home office, you can't claim any part of personal expenses as it relates to utilities and the such, if you don't have a home office to claim those expenses against.

What further complicates the matter is that this is an S-Corp. So all business expenses including the home office would be reported on the 1120-S return I would think. Now why this is set up as an S-Corp is beyond me. I see no sense in it. But then, it's not a business that I own or run either. So I have no understanding in the reasoning behind that.  It is what it is.

having just become self-aware that this is an S-Corp, that may very well make my original response worthless.

[jtax]

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@Carl wrote:

Now why this is set up as an S-Corp is beyond me. I see no sense in it.

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I think people do this for the mythical lure of liability protection (hence the corp, or LLC) and make the S-election because they think they can take some of the profits home without paying social security/medicare. But in a business where it is basically all the owner's labor the reasonable salary that must be paid should be very close to the net profit, wiping out the benefit.