Ordinary and Necessary Business Expenses Explained

In these turbulent and difficult economic circumstances, nearly every business owner is leaving no stone unturned looking for ways to save money. Federal laws passed such as the Families First Coronavirus Response Act and the CARES Act contain numerous provisions that aim to help out individuals and businesses alike. 

As an entrepreneur, you can also strive to make sure that you are using every tax-saving method available to you. A common way for business owners to save money on otherwise-taxable expenses is to deduct “ordinary and necessary” expenses. This blog will give you a general understanding of which expenses may be deductible so that you can use this information to reduce the amount of your business’s taxable income. 

What are Ordinary Expenses?

The IRS code section (26 U.S.C. § 162) dealing with ordinary and necessary expenses does not explicitly lay out how to determine if a specific expense meets this condition, but through court decisions and common sense, we have a fairly good idea of what these expenses are. Ordinary expenses are costs that are typically incurred by other businesses in the same industry. For example, taking a client out to lunch every now and then is common for many businesses. Up to 50 percent of the costs associated with taking a client out to lunch can be deducted as a business expense. Membership fees associated with professional organizations, like the local Chamber of Commerce, may also be deemed “ordinary.” 

What are Necessary Expenses?

For an ordinary expense to be deducted as a business expense, it must also be necessary. Necessary expenses are recognized as costs that must be incurred to carry out your business’ essential functions. Commonly, business owners will deduct monthly bills for internet service; in this era of modern technology, it is almost impossible for a business to be profitable (or even function) without use of the internet. 

What Expenses Are NOT Considered Ordinary and Necessary?

Personal expenses are not considered ordinary and necessary, even if you use company property for personal purposes. For example, using the company car to go on vacation does not mean you get to submit the mileage as an ordinary expense. Also, costs associated with starting a business are designated as “capital expenses,” which are usually tax-deductible but are separate and distinct from ordinary & necessary expenses. 

Conclusion

While the IRS is often lenient when it comes to ordinary and necessary expenses, that is not always the case. If you are in hot water over an expense you claimed to be ordinary and necessary, please call Robert V. Boeshaar, Attorney at Law at 206-207-0582. We are offering free initial consultations to prospective clients during the current health crisis to find out if we can help you.

Written by Robert V. Boeshaar

Robert V. Boeshaar

Robert V. Boeshaar is a Seattle tax attorney committed to helping individuals and small businesses who are facing problems with the IRS. He believes in using his experience to serve others and to make a difference in their lives.