Legal Definitions - business expense

A business expense refers to the costs a company or individual incurs while operating and promoting their business. These expenses are significant because, unlike personal expenses, they can typically be deducted from a business's taxable income, thereby reducing the amount of tax owed.

To qualify as a business expense, a cost must generally meet two main criteria:

• It must be ordinary, meaning it is common and accepted in the specific industry or trade.
• It must be necessary, meaning it is helpful and appropriate for running the business, even if it isn't absolutely essential for survival.

Sometimes, an expense might have both a business and a personal component, known as a mixed expense. In such cases, the primary purpose of the expense is considered. If the expense is primarily for business, a portion, or sometimes even the full amount, may be deductible.

Examples of Business Expenses:

• Example 1: Restaurant Food Supplies

  A local restaurant, "The Daily Dish," purchases fresh vegetables, meats, and spices from a wholesale supplier every week. These food items are directly used to prepare meals for their customers.

  Explanation: This is a clear business expense because buying ingredients is both ordinary for a restaurant business and necessary to create its products (meals) and generate revenue. The cost is directly tied to the operation of the business.

• Example 2: Online Store Website Hosting

  Sarah runs an online boutique selling handmade jewelry. She pays a monthly fee for website hosting services and an annual fee to maintain her domain name (e.g., "sarahsjewelry.com").

  Explanation: For an e-commerce business, website hosting and domain registration are ordinary costs, as nearly all online stores require them to operate. They are also necessary because without them, Sarah's customers would not be able to access her online shop or purchase her products.

• Example 3: Home Office for a Consultant

  Mark, a freelance marketing consultant, works from a dedicated room in his home that he uses exclusively as an office. He calculates a portion of his monthly internet bill, utility costs, and even his mortgage interest that corresponds to the square footage of his home office.

  Explanation: This illustrates a mixed expense. While Mark's internet, utilities, and mortgage are generally personal expenses, the portion directly attributable to his exclusive home office space is considered a business expense. Using a dedicated home office is both ordinary for many freelance consultants and necessary for Mark to conduct his business operations, meet clients virtually, and manage his paperwork.