Ordinary AND Necessary Business Expenses

August 20, 2015 by Ed Becker

The AND is the important word in this title and in the IRS explanation of allowable business expenses. Deductible expenses have to be both, ordinary AND necessary. What does that mean to you as a business owner? The IRS does not explain it separately very well, so we will look deeper into each.

Ordinary expenses for your business would be deemed something that is common and typically accepted in your trade or business. It could be an expense that is deductible for your business, but not for another, because it would not be ordinary for other types of businesses. The courts have described ordinary as, “normal, usual, or customary” within the type of business. It could be something that you always deduct or something that is once in a lifetime, as long as you can show that it would be something common to your type of business or trade. It is not a set in stone definition because it could change with time and circumstances according to your community, your trade and even the economy at that point in time.

The term necessary in the IRS view point is a broader definition. The expense does not have to be absolutely necessary, it must be helpful to your business and appropriate for your business. Necessary is believed to be in the IRS terminology to differentiate between capital expenditures and business expenses.

If your expenses are common and usual in your trade or business type, or for your community and they are helpful and appropriate for your business then they should be deductible as a business expense. For example, if you purchased ski equipment for your clients’ pleasure it is not ordinary and necessary for a mom and pop retail store. But if a ski instructor purchased those same items it now would be ordinary and necessary to their business and seen as a deductible business expense.

If you are questioning the expense and it seems laughable or outlandish, it probably is, and should not be deducted. If your expenses are personal or capital expenditures they are not deductible as business expenses. You cannot deduct the cost of commuting to work from your home, but you can deduct travel expenses for business purposes.

Personal and business expenditures need to stay separate at all times. Do not use the company credit card for personal groceries or family travels. If you pay for business items out of pocket when you are purchasing personal items, try pay separately ensuring that you will have a purely business receipt. This does not mean that you can never personally benefit from deductible business expenses, it just means that you have to be careful and know what is reasonable to deduct as a business expense. If you take your spouse on a business trip, you can deduct 50% of your expenses as business, or only what expenses you would have incurred if you had travelled alone. It is not rocket science to figure out what is ordinary and necessary for most businesses. It is more common sense and not attempting to-get-one-over on the IRS. If you are inherently honest and it really was a business expense that you can justify; take the deduction.