Ordinary and Necessary Business Expenses

Ordinary and Necessary Business Expenses

Clients looking to deduct business expenses often ask us what is considered deductible? While there isn’t a hard dossier of specific items the IRS considers deductible, there are certain guidelines that businesses must grasp when determining their deductible business expenses. Most importantly, those expenses must be BOTH ordinary and necessary for that trade or business to be a deductible expense.

Internal Revenue Code (IRC) 162(a) states:

…There shall be allowed a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….

Ordinary and Necessary

For businesses, what are considered ordinary and necessary expenses? Historical precedence (and numerous court cases) made these definitions clearer. Ordinary can be defined as an expense that is customary or usual in a trade or business. Necessary can be defined as being appropriate and helpful for developing that business. Some common examples would be:

Something to note, costs related to the start-up of a business are treated differently and usually capitalized. The related costs are stretched out over a few years (see our article on startup cost deductions for more information).

It’s ultimately up to the business to prove that claimed deductible expenses are ordinary and necessary. A party rental business may be able to claim deductible expenses related to purchasing clown costumes, but a mortuary business may not be able to do so without scrutiny. Always keep good records.

Business looking to grow should rightfully take advantage of proper ordinary and necessary deductible expenses. Having a proper team of accountants and tax professionals to guide your business along is very important for those and other questions owners may encounter. Businesses have come to rely on MiklosCPA to help them with their accounting and tax needs over the past decade. Would you like to know how we can help your business? Let’s chat.  Also, check out our social media pages for more information and other good to know tax tidbits.

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