The key to running a profitable business is knowing when to spend and how to capitalize on savings opportunities, and business owners cannot save this year and next without understanding which business expenses are tax-deductible for 2026. Cutting costs is important, but certain expenses also reduce tax liabilities. This article examines the deductibility of utility costs. Some key takeaways:
- The IRS defines deductible business expenses as costs that are “ordinary and necessary” for business operations.
- Deductible utilities include electricity, water, natural gas, home heating oil, trash disposal, recycling, internet service, and security systems.
- Your utility bills may be fully or partially deductible based on whether your business location is home-based, commercial, or mixed-use.
According to recent data compiled by tax professionals, 90% of small business owners miss home office deductions because they are unaware of them. This can be particularly costly for home-based business owners and startups struggling to make a profit.
What makes utilities deductible?
The Internal Revenue Service (IRS) defines deductible business expenses as costs that are “ordinary and necessary” for business operations. Utilities fall into this category. You can’t run a home-based business without electricity and water. If you operate in a cold climate, you also need gas or home heating oil. These are all ordinary and necessary expenses you might be able to write off.
Other expenses in this category include trash disposal, recycling, internet service, security systems, and specialized equipment needs. Certain infrastructure needs may also be included, but they must be specific to the business and not a home improvement. Please contact my office if you are unsure about that. The guidelines can be confusing.
Section 179D of the IRS tax code outlines additional utility deductions you may be eligible for, including qualifying energy-efficient commercial building expenses. You can use Form 7205, Energy Efficient Commercial Buildings Deduction, to claim those. This is another area where you may need professional help. I’m happy to answer any questions you have.
Be prepared to prove that the utility expense has a clear business purpose. The IRS requires consistent record-keeping and proper allocation between business and personal use. These are essential to substantiate the exclusive business use of the space for home office deductions. Assume you’ll need this, even if you don’t expect to be asked for it.
Let’s take a closer look at each of the deductible categories.
The IRS publishes detailed documentation on this if you want to delve deeper. Here’s a breakdown of what you’ll be looking for.
- Traditional utilities: Common utility deductions include electricity, natural gas, water, trash removal, and sewage services. If you own or rent a brick-and-mortar business or office space, you can deduct 100% of these “necessary” utilities.
- Modern business necessities: It’s tough to run a modern business without internet and cellphone expenses, which are deductible, but only for the portion of usage that is strictly for business purposes. Using dedicated lines and connections is recommended.
- Security and safety systems: This is one of the business tax deductions that is often missed. The category includes surveillance systems, access control, fire suppression systems, and cybersecurity monitoring services.
- Waste management services: Trash removal is the first thing that comes to mind for this deduction. You can also deduct recycling services, document shredding, hazardous waste disposal, and specialized disposal for businesses with unique waste streams.
- HVAC and climate control: Air conditioning and heat aren’t luxury expenses. They’re essential services for indoor businesses, particularly those with sensitive electronics. Deductible costs include both utility consumption and maintenance contracts.
Note: Mortgage payments on business property are tax-deductible, as well. That’s not a utility, but it’s a large, recurring expense that belongs anywhere we talk about business properties and deductions.
Location matters for utilities deductions.
This is where the situation can get complicated. Your utility bills may be fully or partially deductible based on the location of your business. Several rules on this could significantly affect your deduction approach and limitations. Here’s a breakdown:
- Commercial properties: A commercial property is a business location, so utility bills should be 100% deductible. Possible exceptions to this are using a personal cellphone for business purposes or taking trash home to use residential waste removal services. If the property is a rental, don’t forget about the expansion of depreciation on property renovations under the OBBBA.
- Home offices: The calculation for this business expense can get complicated. The IRS standard deduction for business use of the home is $5 per square foot up to $1,500. This includes utility costs. Refer to IRS Publication 587 for more information.
- Mixed-use properties: Separating business from personal use of utilities is the most difficult part about taking deductions for a mixed-use property. Once that’s done, this is the category where you can significantly trim tax liability with proper documentation.
Strategies for tax reduction can be industry-specific.
Professionals in an office setting consume different resources than retail stores or construction companies, so their utility deductions will be different. Here’s what that looks like:
Professional Services
Attorneys, accountants, and business consultants often underestimate their utility footprint. Client meeting spaces require climate control, conference rooms need audiovisual systems, and security systems need monitoring. The key to taking the deduction is documenting how each utility expense supports client service delivery or business operations.
Retail with Storefronts
Positive customer experience is a critical element for profitability in the brick-and-mortar retail space. Delivering that could require climate control, specialized lighting for merchandise display, and sophisticated point-of-sale systems that need cellular or internet connections. These all fall into the utilities category of business tax deductions.
Construction Companies
A construction site has different utility requirements than a professional office space or retail storefront. Those include job site utilities and temporary power installations for equipment charging stations and mobile command centers. These represent legitimate construction business expenses that directly support revenue-generation activities.
Manufacturing and CPG
Manufacturing businesses should treat production utilities the same as other business expenses. Power consumption is substantial, so that’s an obvious tax deduction. Production line power, quality control lab requirements, warehouse climate control for product integrity, and specialized ventilation systems all qualify for deduction.
Avoid these common pitfalls.
It’s easy to make mistakes when calculating deductions for a business tax filing. That’s one of the reasons why hiring a CPA is beneficial to your company. We understand the potential problems that can turn into costly mistakes and audit triggers. Here are some examples:
- Common allocation errors: Using a personal cell phone to conduct business can lead to allocation errors when calculating your deductions. The IRS only allows business owners to deduct the percentage of the cost equal to the business usage percentage.
- Audit triggers: A dramatic year-over-year change or round numbers that appear arbitrary could trigger an audit. This is something to watch out for this year if you have just learned about deductions you haven’t been taking. Document everything carefully.
- Best practices favor digital tracking systems over paper records. Monthly reconciliation prevents year-end scrambles to reconstruct utility expenses, and cloud-based systems maintain audit trails automatically.
Be aware of current rates and recent changes.
- Mileage rate increases: Effective January 1, 2025, the standard mileage rate for the business use of a car, van, pickup, or panel truck is now 70 cents per mile. This replaces the 2024 standard mileage deduction of 67 cents per mile.
- Standard deduction changes: This is also subject to change each tax year, and it directly affects sole proprietors and LLCs with pass-through income. The standard deduction for the 2024 tax year is $14,600 for individuals and $29,200 for joint filers.
- Equipment deduction limits: Section 179 of the Internal Revenue Code allows businesses to deduct equipment costs of $1,220,000 for tax year 2024 and $1,250,000 for tax year 2025. This is a small change that could easily be missed.
Strategic planning is essential for business owners who want to maximize tax deductions.
- Track everything systematically: Pay your utility bills out of your business checking account so you have a record of every dollar spent. Connect that bank account to an accounting platform like QuickBooks to properly allocate your expenses.
- Understand the impact: Using utility and other deductions to reduce your tax liabilities will increase the profitability of your company. That will also improve cash flow and provide you with more opportunities for growth and scale.
- Consider professional help: This may seem like simple math at first glance, but tax rules and regulations change every year, and expense deductibility can be complicated. Consider hiring my firm to do the work for you. We’re standing by to assist you.
Don’t leave money on the table through missed deductions or inadequate record-keeping.
Utility deductions represent accessible opportunities for most businesses to reduce their tax liability. From basic electricity and water service to modern internet infrastructure and security systems, properly documented utility costs can significantly lower your taxable income. That’s as important for home-based businesses as it is for retail stores and construction companies.
Proper deduction planning requires understanding current regulations, maintaining thorough documentation, and applying allocation methods that will withstand IRS scrutiny within a proactive, strategic tax plan.
Schedule a discovery call to review your specific situation and identify opportunities you might be overlooking.
Talk soon,
Jeremy A. Johnson, CPA