What qualifies
Electricity, gas, water, sewer, trash collection, internet, security monitoring, and cleaning services for a separate office or retail space — not your home — are 100% deductible without allocation.
Where it goes
Schedule C line 25 ("Utilities"). Internet and phone may go here or on line 27 with a labeled detail; pick one and stay consistent.
CAM charges
Common area maintenance (CAM) charges, real estate taxes, and insurance pass-throughs in a triple-net lease are part of the rent payment and follow the rent characterization. Some leases break them out separately on the bill — treat them however the lease classifies them, with rent on line 20 and utilities on line 25.
Coworking utilities
In a coworking space, utilities are bundled into the membership fee — no separate deduction. The whole fee is deductible as rent or office expense.
Setup costs
One-time costs to set up utilities at a new office (deposits, connection fees, modem rental) are deductible in the year paid. Equipment installed (security camera systems, HVAC) may need to be capitalized if they have a useful life over a year.
Worked example with numbers
Consider a sole prop with $100,000 in gross receipts and $30,000 in legitimate Schedule C deductions, including this category. Each additional $1,000 of qualifying expense reduces Schedule C net profit by $1,000, which reduces self-employment tax by approximately $1,000 × 92.35% × 15.3% ≈ $141, and reduces income tax by $1,000 × marginal rate. At a 22% federal marginal rate, the combined federal tax savings on each additional $1,000 of legitimate deduction is roughly $361, and state savings sit on top of that. The math is why disciplined categorization throughout the year pays for itself.
Common mistakes that disallow the deduction
The recurring ways this deduction gets disallowed in examination cluster in four categories: (1) personal-use expenses bundled with business (the deduction is disallowed entirely or apportioned downward); (2) inadequate substantiation (no receipt, no invoice, no business-purpose note); (3) the wrong line on Schedule C (not fatal, but it weakens audit defense); and (4) double-counting with another line (for example, deducting an expense on Schedule C and also on Form 8829, or as a personal itemized deduction on Schedule A). The fix in every case is contemporaneous bookkeeping and a clean chart of accounts.