Question

What impact do ordinary, necessary and reasonable expenes have on different entities, like oil companies, farmers etc.

Answer 1

We must understand defination of all expenses first.

Ordinary Expense is like general expense, example are rent, insurance etc.

Necessary expenses are those which are must for any business example electricity bills, labour costs etc.

Reasonable expenses means expenses shall not be in excess of normal. suppose labour rate per day is 10 and number of labour employed on a single day are 10 then reasonable expense is 100. more than 100 is unreasonable.

All the expenses incurred shall be ordinary, nessesary and reasonable for every business entity.

Impact on Farmers : expense of showroom rent is not an ordinary expense for farming, it is also not necessary and its not reasonable also for farming.

Impact on Oil Comapnies : Expense incurred for buying tobacco for consumption of workers is absolutely not an ordinary expense, it is also not nessesary for running oil industry.

Major Impact is on Tax returns filled by various entities, every expense incurred by any entity must be ordinary in course of business, necessary for operation of business and must be reasonable and not excessive means it shall be normal. IRS may disallow such expences.

Infact for all the industries, expenses shall be ordinary, necessary and reasonable.