Legal Definitions - ordinary and necessary business expense

An ordinary and necessary business expense refers to a cost that a business incurs which is both common and accepted in its industry (ordinary), and also helpful and appropriate for running the business (necessary). These expenses are generally deductible for tax purposes, meaning they can reduce the business's taxable income.

To qualify, an expense does not have to be recurring or indispensable, but it must be directly related to the operation of the business and contribute to its ability to generate income.

• Example 1: A Small Law Firm's Office Rent

  A small law firm pays monthly rent for its office space in a commercial building. This expense is considered ordinary because it is a common and accepted practice for professional service businesses like law firms to operate from a dedicated office. It is necessary because the office provides a professional environment for meeting clients, conducting research, and housing staff and equipment, which is helpful and appropriate for the firm's operations and reputation.

• Example 2: A Freelance Photographer's Equipment Maintenance

  A freelance photographer regularly pays for the cleaning and calibration of their professional camera lenses and bodies. This is an ordinary expense because photographers routinely maintain their specialized equipment to ensure optimal performance and image quality. It is necessary because well-maintained equipment is crucial for the photographer to produce high-quality work for clients, directly impacting their ability to earn income.

• Example 3: A Software Development Company's Cloud Hosting Fees

  A software development company pays monthly fees for cloud hosting services to run its applications and store customer data. This expense is ordinary within the technology industry, as cloud infrastructure is a standard and widely accepted solution for deploying and managing software. It is necessary because the hosting services are essential for the company to deliver its software products to clients and maintain their functionality, making it a fundamental part of its business model.