It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.
O is for Ordinary and Necessary.
To claim a deduction for business expenses, Section 162 of the Tax Code requires that the expense is “ordinary and necessary.” According to the Internal Revenue Service (IRS), an ordinary expense is one that is common and accepted in your trade or business. The IRS defines a necessary expense as “one that is helpful and appropriate for your trade or business.”
No matter what the industry, that is the standard that the IRS will use. So, any time that you question whether something is deductible, as a first step, ask yourself is this “ordinary” and “necessary”?
- An ordinary expense is one that is common and accepted in your industry. It’s the one time that you care about what your competitors are doing. No matter what your mother says, it does matter whether everyone else is doing it, too.
- A necessary expense is one that is helpful and appropriate for your trade or business. You don’t have to prove that you couldn’t be in business without the expense – more or less, it needs to make good business sense.
Again, for an expense to be deductible, it needs to be both.
You can find the rest of the series here: