With the rise of subscription services like Netflix, Amazon Prime, meal kits, and more, many taxpayers wonder if they can write off these recurring expenses on their taxes. The answer depends on several factors, chiefly whether the subscription is for personal or business use. Here’s what you need to know about writing off subscriptions on your taxes.
Personal vs. business subscriptions
The IRS makes a distinction between personal and business expenses. In general, you can only deduct expenses that are considered “ordinary and necessary” for conducting a trade or business. So if a subscription is for personal entertainment, convenience, or other non-business purposes, you cannot deduct it.
However, if you use a subscription service for business purposes, you may be able to deduct it as a business expense. For example, a subscription to an online software, data service, or other tools that you use for your work can potentially be deducted. The key is being able to prove the business purpose.
Home office deduction
If you qualify for the home office deduction, you may be able to deduct a portion of some subscriptions used for your home-based business. For example, you could potentially deduct a percentage of your cable/internet bill since you use it for your home office.
Types of deductible subscriptions
Here are some examples of subscriptions that may be deductible if used for business:
- Online software and apps
- Cloud storage or backup services
- Membership in professional organizations
- Industry magazines or publications
- Newspapers and news services
- Data services
- Virtual phone systems
- Website and domain hosting fees
The key is being able to show these subscriptions provide an essential business function. For example, a photographer may deduct Adobe Creative Cloud because they use it to edit photos for clients. A freelance writer may deduct a subscription to Grammarly because they use it to edit articles.
Examples of non-deductible subscriptions
As mentioned, you generally cannot deduct subscriptions for personal, living, or family expenses. Here are some examples of non-deductible subscriptions:
- Netflix, Hulu, Amazon Prime
- Meal delivery kits like HelloFresh or Blue Apron
- Newspaper and magazine subscriptions for personal reading
- Music streaming services like Spotify or Apple Music
- Gaming services and apps
- Dating apps
- Personal cloud storage like iCloud
While you may use services like Netflix or Spotify while working at your home office, they are still primarily for personal entertainment and living expenses.
Writing off annual vs. monthly subscriptions
Many subscriptions are paid on a monthly basis but can also be paid annually at a discount. Whether you pay monthly or annually does not affect the deductibility. The key factor is still the business purpose.
However, there may be some tax advantages to paying annually:
- Larger upfront deduction if paid annually
- Easier recordkeeping with only one payment per year
- Potentially avoids exceeding capitalization limits for expense deductions
The Section 179 deduction and bonus depreciation can allow you to deduct most or all of an asset purchased for your business in the year of purchase. But these deductions have annual limits that apply to the total amount deducted. Paying for subscriptions annually rather than monthly can help avoid hitting these limits.
Recordkeeping requirements
To claim a tax deduction for a business subscription, you need to have proper documentation. This includes:
- Receipts showing payment details including date, amount, and who payment was made to
- Records showing the business purpose for the subscription
- Records of the date you started and ended the subscription if not for the entire tax year
Credit card and bank statements can serve as documentation for payment. And for some major subscriptions, like professional organization dues or software, the purpose may be self-evident. But you still need some record showing you use it for business rather than personal purposes.
How to deduct business subscriptions
If you determine a subscription qualifies as a deductible business expense, there are a couple ways you can deduct it:
Deduct on Schedule C (Form 1040) for sole proprietors
If you are a sole proprietor filing Schedule C with your 1040, deductible subscriptions can be included with other business expenses. Report them on Part V, line 27. You enter the business name and total expense amount.
Deduct on business tax return forms
If you have an LLC, S corporation, partnership or other business entity, deductible subscriptions are reported on the following forms:
| Business Type | Tax Form |
|---|---|
| S corporation | Form 1120S, line 11 |
| C corporation | Form 1120, line 26 |
| Partnership | Form 1065, line 18 |
| LLC | Appropriate business return form as chose above |
The subscription expenses are lumped in with other deductible expenses like office supplies, software, internet service, etc. Be sure to keep your documentation.
Tax treatment of partial business use
Some subscriptions may be used partly for business and partly for personal reasons. In this case, you can only deduct the portion of the cost related to business use.
The most common method is to compare the time used for business versus personal. For example, if you use a streaming media subscription 30% for business and 70% personal, you can deduct 30% of the cost.
An alternative is to compare the number of TVs or devices used. For example, if you have 4 televisions with a cable subscription, and one is exclusively used for your home office, you could potentially deduct 25% (1/4) of the total cost.
Having a reasonable method to allocate between business and personal use is key. Being able to demonstrate how you arrived at the percentage deducted is critical in case of an audit.
How to maximize tax deductions
Here are some tips to maximize your tax write-offs for subscriptions:
- Bundle subscriptions used for business to claim full deduction
- Pay subscriptions annually rather than monthly if cash flow allows
- Use promo codes and discounts to reduce costs
- Only use the minimum features needed for business to maximize deductible portion
- Evaluate business need on regular basis and cancel unneeded subscriptions
Conclusion
Subscriptions can potentially offer nice tax deductions for your business if used for legitimate business purposes. Be sure to keep detailed records demonstrating the business use and how you allocate between personal and business percentages. With the rise of streaming media and cloud services, subscription write-offs are becoming more common but you still need to prove their business necessity.
