What “Ordinary and Necessary” Business Expenses Really Means (In Plain English)
If you run a business, you probably spend money every week on things that help you operate, serve customers, and grow. Many of those costs can potentially reduce your taxable income. But not every expense counts as a business deduction, and some categories get more scrutiny than others.
The Internal Revenue Code requires that business expenses be ordinary and necessary to be deductible. Those words can sound like jargon, but the concept is practical: the expense should make sense for your type of business, and it should have a real business purpose.
The Two-Part Standard: “Ordinary” and “Necessary”
An expense is generally ordinary if it is common and accepted in your industry. It does not have to be something you pay daily, and it does not have to be something every competitor pays for. The point is that the cost is a normal type of expense for a business like yours.
An expense is generally necessary if it is helpful and appropriate for running your business. “Necessary” is often misunderstood. It usually does not mean “absolutely required.” Instead, think of it as: would a reasonable business owner see how this expense helps the business operate, earn revenue, or reduce risk?
Put together, the standard is meant to separate true business costs from personal spending dressed up as business activity.
Common Examples of Potentially Deductible Business Expenses
Context matters, but many routine operating costs are frequently deductible when they are truly connected to your business. Examples include:
- Advertising and marketing, such as online ads, website hosting, print materials, sponsorships, and promotional costs
- Employee wages and other payroll-related expenses
- Rent for office, retail, storage, or other business space
- Supplies and day-to-day operating purchases
- Professional services, such as accounting, legal, bookkeeping, and other outside help
- Software subscriptions and technology tools used to run the business
- Utilities and communications, like business phone and internet
- Travel that is directly tied to business purposes
Where Deductions Get Tricky: The Gray Areas
Some expenses are more likely to cause confusion because they can be partly personal, they can feel “optional,” or they can be hard to connect to a business purpose without extra explanation. These expenses are not automatically non-deductible, but they often require clearer documentation and better judgment.
Common gray areas include:
- Vehicle expenses when a car or truck is used for both business and personal driving
- Meals tied to business discussions or travel, especially if the “who, what, and why” is not documented
- Travel that mixes business and personal time (for example, a conference plus a vacation)
- Home office costs, depending on how the space is used and whether it is truly set aside for business
- Clothing that could be worn outside of work
A helpful way to think about these categories is: if someone unfamiliar with your business looked at the expense, would they immediately understand the business purpose? If not, you may need stronger documentation, or you may want to think more about how it is reported.
Documentation: The Part People Underestimate
Even a legitimate expense can become a problem if you cannot support it. Good records help show:
- The expense was actually paid
- The amount is accurate
- The expense was connected to business activity
Practical documentation usually includes:
- Receipts and invoices
- Bank and credit card statements
- A brief business purpose note for anything that is not self-explanatory
- Logs or tracking for mixed-use items, such as mileage tracking for vehicles
One simple habit can save a lot of time later: when you make a purchase that could be questioned, write a short note the same day with the business reason (for example, “met with vendor about supply contract” or “travel to job site to oversee installation”).
A Quick Self-Check Before You Deduct an Expense
Before you decide a cost is a business deduction, ask yourself:
- Is it primarily business-related, rather than personal?
- Is it the kind of cost that is common in my industry or in businesses like mine?
- Is it helpful to the business in a clear way?
- Is the amount reasonable for what I received?
- Do I have records that show what it was and why it matters?
If the answer is “I’m not sure,” that is usually a sign to take a closer look before filing. Often, the issue is not the expense itself, but whether it is documented well enough or categorized consistently.
If You Want Help
If you are trying to clean up your bookkeeping, decide how to handle borderline expenses, or build a documentation routine that holds up over time, professional guidance can help you make decisions with more confidence.
Dean Business & Tax Law works with business owners on practical tax planning and documentation questions, including how to think about business expenses in a way that is clear, consistent, and supportable. If you would like to discuss your situation, you can call (208) 248-0800.