Daycare Tax Tips

How much of this provider's cable/internet/phone service is deductible?

Combined billing for bundled communications services complicates things

A family child care provider writes:

> Please tell me what part of my cable/internet/phone bill can be deducted??

This is actually kind of complicated. The simple answer is that you can deduct the business portion of your cable/internet/phone service bill. But how do you figure that out?

I believe it is reasonable to use your time/space percentage to figure the business deduction for communications services. If you feel that your actual business usage is higher than that, however, you can use a higher percentage. Documenting higher usage (and possibly having to prove it to an auditor) can be a real pain, however, and often it's not worth the effort.

One complicating factor is the long-standing IRS rule that the cost of local service for the first phone line into your house cannot be treated (even partially) as a business expense. This is from the old days of telephone bills broken down into local and long distance charges. Such telephone bills still exist, but more and more, people now have bundled services and/or cell phones.

This brings up another complicating factor, because it is often difficult to break down bundled service bills by family member or by service. Nevertheless, this has to be done sometimes. In this telephone article, Tom Copeland suggests splitting bills evenly, when no other guidance is available. Thus, if the bill covers phone, Internet, and cable charges, for example, you allocate one third of the total cost to phone service.

Here is how I handle deducting the cost of phone service:

>> Assuming that the client uses two phones for business purposes (land line and cell), we determine which phone costs the most. Then we treat the most expensive monthly service as the "second phone line" and apply the time/space percentage to figure the business deduction. (In California, most child care providers have a cell phone, as well as the land line required by licensing.)

>> If the client's cell phone costs the most and they are on a family plan, the child care provider must determine how much of the bill applies to just to her phone service before applying the time/space percentage.

>> If the client chooses to deduct her cell phone bill and also has bundled cable/internet/home phone service, she can deduct a portion of the bundled service, too. First we will have to subtract the cost of home phone service, however.

One nice thing is that the IRS recently removed cell phones from their "Listed Property" classification, beginning with the 2010 tax year. This means that old rules requiring detailed substantiation no longer apply. In plain English, this means that an auditor should not ask you for detailed business call logs. Thank goodness!

Last updated 22 August 2013

Posted on 2011-08-30 18:30:15