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Many computer services are available on a freemium model where some service is available for free, and then you can pay more for upgraded service Suppose that I am self-employed in the USA. Typically, if some good or service is used partly for personal and partly for business use, a business deduction can only be taken for the portion that is used for business. My question is, if the nature of the service is such that my personal usage fits into the free "tier", but I upgrade to paid to get more space/service/whatever for business purposes, can the entire cost of the paid tier be deducted as a business expense, on the theory that the entire choice to upgrade to paid service was only necessary for business use?

To give a concrete example: Dropbox gives you 2GB of storage for free. If you pay $100 you get up to 1TB. If my personal usage of Dropbox is under 2GB, but I pay the $100 to get 1TB because I need it for business usage, can I deduct the entire $100 as a business expense?

This example may seem a bit silly because even if I prorated the deduction based on the actual storage amounts, 2GB is such a tiny fraction of 1TB that the difference would likely be negligible. However, my question is whether the actual amount of paid/free service actually matters, or whether it only matters whether the free level is sufficient for personal use. For instance, suppose Dropbox offered 500GB for free, and 600GB for $100. My personal usage is under 500GB, but for business purposes I really need that extra 100GB, so I pay the $100. For purposes of a business expense deduction, does it matter that 500GB of the 600GB is for personal use, or does it only matter that all of the $100 was paid in order to get the extra 100GB for business use? The example here is for Dropbox but the same question can apply to many services (e.g., backup services, web hosting, subscriptions to online publications, whatever).

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    I'd suggest a separate account for business purposes; especially if there is a no cost free tier... – quid Aug 5 '17 at 5:32
  • @quid Looking at his DropBox example--you can't be logged into two DropBox accounts at once. If the machine is used for both work and personal stuff the hassle factor of two accounts would be substantial. – Loren Pechtel Aug 5 '17 at 20:49
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Disclaimer: This should go without saying, but this answer is definitely an opinion. (I'm pretty sure my current accountant would agree with this answer, and I'm also pretty sure that one of my past accountants would disagree.)

When I started my own small business over 10 years ago I asked this very same question for pretty much every purchase I made that would be used by both the business and me personally. I was young(er) and naive then and I just assumed everything was deductible until my accountant could prove otherwise. At some point you need to come up with some rules of thumb to help make sense of it, or else you'll drive yourself and your accountant bonkers. Here is one of the rules I like to use in this scenario:

If you never would have made the purchase for personal use, and if you must purchase it for business use, and if using it for personal use does not increase the expense to the business, it can be fully deducted by the business even if you sometimes use it personally too.

Here are some example implementations of this rule:

  1. You don't have a cell phone and would never buy one, you start a business, and you need a cell phone for business calls. You get a phone and the service has unlimited minutes so it doesn't cost you any more if you use the cell phone for personal use. This would be fully deductible by the business. (Note: the situation posed in your question falls into this category. I'd say 100% deductible by the business.)
  2. You already have a cell phone, you start a business, and you also need a cell phone for business calls. In this case you could get a free or inexpensive phone number for the business and forward it to your personal cell phone. Your existing cell phone plan cannot be paid for by the business, but you did just save the business a monthly expense. (Bonus!)
  3. You don't have a tablet, but the business needs one for giving demos to potential clients. The table expense is 100% deductible by the business and it's OK if you sometimes use it for personal use.
  4. You have a tablet, and your business needs to use it. You can simply let your business use it free of charge!
  5. You've been thinking about getting a tablet because it would be cool to have one, and now you need one for your business. Who pays for it, you or the business? In this case you should try to really think about if you would pull the trigger on your own, in which case it's a personal expense, but if you can't decide, or if you need to purchase a better tablet for the business than what you'd buy personally, I'd lean towards a business expense.

Note about partial expenses: I didn't mention partial deductions above because I don't feel it applies when the criteria of my "rule of thumb" is met. Note that the IRS states:

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.

At first read that makes it sound like some of my examples above would need to be split into partial calulations, however, I think the key distinction is that you would never have made the purchase for personal use, and that the cost to the business does not increase because of allowing personal use. Partial deductions come into play when you have a shared car, or office, or something where the business cost is increased due to shared use. In general, I try to avoid anything that would be a partial expense, though I do allow my business to reimburse me for mileage when I lend it my personal car for business use.

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