Tuesday, January 8, 2013

Ordinary and Necessary Business expenses

§ 162 says that deductions shall be allowable for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.An ordinary expense is one that is normally to be expected in view of the circumstances facing the business, and a “necessary” expense is one that is appropriate and helpful to the business.

Necessary means “appropriate and helpful” in the development of the taxpayer’s business. A requirement that a business show the absolute necessity of its expenses, in other words, would put the IRS in the position of reviewing every business decision to ensure that no money was spent unnecessarily.

Ordinary Expense-  The question of whether expenditure is “ordinary” has been more controversial in the development of the business deduction.  "Ordinary” means something that is “normal, usual, or customary” in the trade or business in which the taxpayer is engaged. Commonplace and used up in the course of a year. NOT CAPITAL EXPENSE.

The Principal function of the term “ordinary” is to clarify the distinction, often difficult, between those expenses that are currently deductible and those that are in the nature of capital expenditures, which, if deducible at all, must be amortized over the useful life of the asset.

There could be a public policy exception for some types of ordinary and necessary business expenses under § 162.

More Business Tax Information:

What are IRS Ordinary and Necessary Business Expenses

4 comments:

albina N muro said...

that deductions shall be allowable for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. tenuta contabilità srl

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