What is Ordinary and Necessary Expenses?

Under the tax code, a business can generally deduct expenses that are both ordinary and necessary for carrying on its trade or business. The IRS explains the standard in Publication 334.

What the terms mean

• Ordinary: common and accepted in your trade or business
• Necessary: helpful and appropriate for your trade or business; it does not have to be indispensable

A landscaper's mower, a consultant's software subscription and a restaurant's food costs all clearly qualify.

Expenses that need more

Some expenses that pass the basic test are subject to additional rules:

• Capital expenses must generally be capitalized and depreciated; see capital expenditure
• Meals are generally 50% deductible; see business meals
• Gifts are limited per recipient; see business gifts
• Vehicle and travel expenses require specific records

Expenses that are not deductible

• Personal, living or family expenses
• Entertainment, generally
• Fines and penalties paid to governments
• Political contributions
• Expenses of a hobby; see hobby or business

Mixed-use expenses

When an item is used for both business and personal purposes, such as a phone or vehicle, only the business portion is deductible, and records should support the split.

Documentation

Every deduction should be supported by records showing what was paid, to whom and the business purpose. See what business records to keep.

Related terms

• Capital Expenditure: A capital expenditure is spending on assets that will benefit the business for more than a year, such as equipment, vehicles or building improvements.

Browse more definitions in the small business glossary.