Question

1. What is ordinary, necessary and reasonable in relation to business expenses deduction.

2.Discuss geographic impact on the above.

3. Discuss the impact of cash bases and accrual based accounting in business expense deductions.

Answer 1

1. Ordinary, necessary and reasonable in relation to business expenses deduction.

The expense must be both “ordinary” and “necessary" to be deductible as a business expense,

Ordinary Expenses: Things that are commonly used, and accepted by general industry standards. That is, things that are typical in your trade or business that are needed to run your business. Ordinary expenses must also be necessary in order to deduct them from your business taxes.

Necessary Expenses: Costs for things helpful and appropriate in running your trade or business. Necessary expenses are not tax deductible unless they are also ordinary expenses.

Resonable: Ordinary and necessary expenses must also be “reasonable,” or the IRS may disallow the expense.

• An example of a Reasonable, “Ordinary and Necessary” Business Expense: Costs associated with sending out newsletters, holiday cards, or other promotional literature being distributed to promote customer relations or generate new business.
• An example of an “Unreasonable” Business Expense: Paying $5,000 for designer curtains for your home office. This expense would not be considered ordinary or necessary.