What expense category is VPN Subscriptions?

In an era of remote work and heightened cybersecurity threats, providing employees with a Virtual Private Network (VPN) is a critical measure to ensure secure access to company data. The recurring fees paid for business VPN subscriptions are a necessary cost of modern IT infrastructure.

For accountants and business owners, it's essential to understand that these subscription fees are fully deductible as a business expense. This guide will clarify how to categorize VPN costs in accordance with IRS rules, outline the key considerations for deducting them, and provide guidance on tracking them for accurate tax compliance.

VPN (Virtual Private Network) Subscriptions (Business) Category

The fees you pay for a business VPN subscription are an ordinary and necessary business expense. Since you are paying for the use of a service and digital infrastructure that you do not own, these costs are best classified under one of the following categories, based on the principles in IRS Publication 535:

1. Dues and Subscriptions: This is a common and appropriate category for ongoing access to software and services.
2. Rent or Lease Expense: You are effectively renting secure access to a network, which aligns with the IRS definition of rent.
3. Utilities: Some businesses may bundle VPN services with other essential utilities, such as internet and telephone services.

Important Considerations While Classifying VPN Subscriptions

The most critical factor in deducting these costs is to ensure they are for business use, not personal.

Business vs. Personal Use

You can only deduct expenses that are directly related to your trade or business.

• 100% Business Use: If the VPN subscription is used exclusively by employees for business purposes, the entire cost is deductible.
• Mixed Use: If a VPN is used for both business and personal activities (for example, by a sole proprietor), the cost must be allocated accordingly. You can only deduct the portion of the subscription fee that corresponds to the percentage of time it was used for business.

The Prepayment Rule

If you pay for a multi-year VPN subscription in advance, you cannot deduct the entire payment upfront. IRS rules state that you must prorate the expense and deduct only the portion that applies to the current tax year. For example, if you pay for a three-year subscription in 2025, you can only deduct the cost attributable to 2025 on your 2025 tax return.

Tax Implications and Recordkeeping

To deduct your business VPN subscription fees, you must report them correctly and maintain proper documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), VPN subscription fees are deducted in Part II, Expenses. They can be reported on Line 25, Utilities, or under Line 27a, Other Expenses, with a clear description, such as Software Subscriptions or VPN Service.

What Records to Keep

You must have documentary evidence to substantiate your expenses. Your records for a VPN subscription should include:

• The service agreement with the VPN provider.
• Monthly or annual invoices detailing the service period and charges.
• Proof of payment, such as credit card statements.

How Fyle Can Automate Expense Tracking for VPN Subscriptions

Fyle helps you manage and document recurring IT service subscriptions, ensuring every payment is captured and correctly coded for tax time.

• Centralize Invoices: Have your VPN provider email invoices so they can be sent to Fyle for automatic and accurate data capture.
• Automate Recurring Payments: Fyle’s real-time credit card feeds can instantly capture recurring monthly subscription fees paid on a business card.
• Track by Department: Code VPN costs by department for precise cost allocation and internal budgeting.
• Automate Your Accounting: Sync the categorized expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.