Utilities expenses are the recurring charges for the services that keep a property functional: electricity, natural gas, water, sewer, trash removal, phone, and internet. For a business or self-employed taxpayer, most of those costs are deductible as ordinary and necessary business expenses. The category has firmer edges than it looks, though. Things that arrive on a utility bill aren’t always utilities for tax purposes, and things that feel utility-adjacent (security monitoring, cable, bulk fuel) are classified somewhere else entirely.
The Core Utility Categories
The traditional utilities are the metered services physically connected to a building.
Electricity and natural gas are the primary energy utilities. Providers measure consumption in kilowatt-hours for electricity and therms for gas, and bills usually combine a fixed base charge with a variable usage rate. Commercial accounts often carry a “demand charge” based on the highest level of power drawn during a billing cycle, which can dwarf the raw energy cost. Residential or commercial, these energy charges qualify as utilities.
Water and sewer typically appear on a single municipal bill covering both potable water and wastewater removal, measured in cubic feet or gallons. High-volume users like restaurants and laundromats often face discharge surcharges, and those surcharges are part of the utility expense.
Waste management covers regular trash pickup, recycling, and specialized disposal such as medical or chemical waste. Commercial waste contracts tend to be flat-rate agreements based on dumpster size and pickup frequency, making them one of the more predictable lines on a monthly budget.
Communication and Internet Services
Connectivity is different from a metered commodity, but it’s treated as a utility for accounting and tax purposes.
Internet service is a necessary business utility regardless of whether it arrives over fiber, cable, or DSL. When the connection is used entirely for business, 100% of the monthly cost is deductible as an ordinary and necessary expense.
Landline telephone service at a business-only location is straightforward: the full monthly bill is a utility expense. A landline in a home changes the analysis, which is covered further down.
Cell phone service is a utility expense to the extent it’s used for business. Since 2010, the IRS has no longer treated cell phones as “listed property” requiring heightened record-keeping, so the substantiation burden is the same as for any other business expense.1Internal Revenue Service. IRS Notice 11-72
What Doesn’t Count as a Utility Expense
Several costs that show up next to utility bills, or feel like they belong there, are classified differently. Misfiling them is a common bookkeeping mistake and can distort a legitimate deduction.
- Repairs to utility infrastructure. Fixing a leaking pipe or replacing a broken electrical panel is a repair and maintenance expense, not a utility cost, and it goes on a separate line of the return.
- Security monitoring fees. Alarm monitoring uses electricity and phone lines, but the fee pays for a surveillance and response service. The IRS treats it as a general business expense rather than a utility.
- Bulk fuel purchases. Heating oil delivered by tanker, propane refills, and wood pellet deliveries are purchased in discrete quantities rather than metered continuously, so they fall into supplies or inventory.
- Cable television. A standard cable subscription is a personal expense for most businesses. A narrow exception applies where programming is part of the customer-facing operation (a sports bar, a hotel lobby), but even then it’s a business expense rather than a utility.
- Smart home subscriptions. Fees for smart thermostats, connected lighting, or home automation apps are software or service subscriptions, potentially deductible as operating expenses but not utilities.
- Franchise fees and surcharges. Line items on your utility bill labeled “franchise fee” or “infrastructure maintenance fee” are pass-through charges from the municipality. They’re part of your total utility bill and don’t need to be broken out.
Deducting Utilities for a Business Location
For a standalone business location such as a storefront, warehouse, or leased office, the deduction is simple. The full cost of electricity, gas, water, sewer, trash removal, internet, and phone service qualifies as an ordinary and necessary business expense under Internal Revenue Code Section 162.2Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
Sole proprietors and single-member LLCs report these costs on Schedule C (Form 1040), Line 25, which is specifically designated for utilities.3Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) Partnerships, S corporations, and C corporations deduct utilities on their respective business returns. There’s nothing complicated about it when the utility account serves only the business.
Home Office Utility Deductions
Complications start when a single utility bill covers both personal living space and a home-based business. Federal law generally disallows deductions for expenses tied to a dwelling used as a residence, then carves out an exception when part of the home is used exclusively and regularly as the taxpayer’s principal place of business.4Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. “Exclusively” is doing heavy lifting. A desk in the corner of a bedroom you also sleep in doesn’t qualify. The space has to be dedicated to business.
A self-employed taxpayer who meets that test can deduct the business portion of home utilities using one of two methods.
Actual Expense Method
The standard approach calculates a business percentage by dividing the square footage of the dedicated workspace by the total square footage of the home. A 300-square-foot office in a 2,000-square-foot house works out to 15%. Apply that percentage to your total annual spending on electricity, gas, water, trash, and similar home utilities. The deduction is claimed on Form 8829, Expenses for Business Use of Your Home, which flows through to Schedule C.5Internal Revenue Service. Publication 587 (2025), Business Use of Your Home
One important limit. Total home office deductions, including the utility portion, cannot exceed the gross income from the business use of the home. If a home-based business earns $3,000 and calculated home office deductions total $4,500, only $3,000 is claimable that year. The excess carries forward.4Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
Simplified Method
The IRS also offers an alternative that skips the record-keeping. Under the simplified method, you deduct $5 per square foot of home used for business, capped at 300 square feet, for a maximum annual deduction of $1,500.6Internal Revenue Service. Simplified Option for Home Office Deduction No utility bills to track, no percentage to calculate. The tradeoff is obvious: if actual expenses would produce a larger deduction, that money is left on the table. For a small workspace in a low-cost area, the simplified method saves time.
You can switch between the two methods from year to year, choosing whichever produces the better result.6Internal Revenue Service. Simplified Option for Home Office Deduction
Sub-Metering and Separate Accounts
The cleanest option for audit purposes is direct billing or sub-metering. A secondary electric meter on a high-draw piece of equipment like a server rack, or a separate utility account for a detached workshop, lets you deduct 100% of that metered usage as a direct business expense. The meter proves exactly how much the business consumed, so no allocation formula is needed.
Phone and Internet Allocation Rules
Phone and internet have their own set of rules that trip up a lot of home-based business owners.
The first landline into your home is a personal expense, period. You cannot deduct the base service charge for that line, even if you use it for business calls every day. What is deductible on the first line is the long-distance charges specifically attributable to business, and separately, the full cost of a second line used exclusively for the business.5Internal Revenue Service. Publication 587 (2025), Business Use of Your Home These phone deductions go on Schedule C, Line 25, not on Form 8829 with the rest of the home office costs.3Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
Cell phones follow different rules. The Small Business Jobs Act of 2010 removed cell phones from the “listed property” category, which eliminated the strict call-logging requirements that used to apply. You can now deduct the business-use percentage of a cell phone bill using any reasonable method. If 70% of your cell use is business-related and that estimate is defensible, that’s enough.
Internet service used for both personal and business purposes should be allocated based on a reasonable estimate. A time-based method works: eight hours of daily work use and two hours of personal browsing supports an 80% business share. Unlike the first-landline rule, there’s no blanket prohibition on deducting home internet, just a requirement that the business percentage be supportable.
Device cost is separate from monthly service. Equipment costing $2,500 or less can typically be expensed immediately under the de minimis safe harbor election; above that threshold, the device may need to be capitalized and depreciated. Most smartphones and tablets fall under the $2,500 line.
Utilities in a Lease
One boundary worth flagging. Whether utilities are a deductible expense depends on who actually pays them. In most residential leases, the terms of the lease control, and where the lease is silent, state law fills the gap. In many states the tenant is responsible unless the landlord agreed otherwise in writing, though multi-unit buildings on a single master meter are a common exception. Commercial leases vary widely: a triple net lease passes utilities to the tenant, a gross lease bundles them into rent, and many arrangements sit somewhere in between. Whatever the structure, the party who pays the utility company is the party with the deduction.