Legal Definitions - ordinary and necessary expense

An ordinary and necessary expense refers to a cost incurred by a business or individual that is both common and accepted in their industry or profession (ordinary) and helpful or appropriate for carrying on their trade or business (necessary). For an expense to be considered "ordinary," it doesn't have to be a recurring expense, but it must be a type of expense that is generally accepted in that specific business. For an expense to be "necessary," it doesn't have to be indispensable, but it must be appropriate and helpful for developing or maintaining the business. These expenses are typically deductible for tax purposes, meaning they can reduce the amount of income subject to tax.

• Example 1: Freelance Graphic Designer

  A freelance graphic designer purchases a new high-performance computer and a monthly subscription to professional design software. These are ordinary expenses because it is common for graphic designers to use powerful computers and specialized software in their work. They are necessary expenses because these tools are essential for the designer to create high-quality work, meet client demands, and operate their business effectively.

• Example 2: Local Coffee Shop

  The owner of a local coffee shop pays for monthly rent for the storefront, purchases coffee beans and milk from suppliers, and pays salaries for their baristas. These are ordinary expenses because paying rent, buying ingredients, and compensating employees are standard and widely accepted practices for operating a coffee shop. They are necessary expenses because without a physical location, ingredients, and staff, the coffee shop cannot produce and sell coffee or serve its customers.

• Example 3: Independent Truck Driver

  An independent long-haul truck driver pays for fuel, routine vehicle maintenance, and tolls for their routes across different states. These costs are ordinary because they are typical and expected expenditures for anyone operating a commercial trucking business. They are necessary because fuel is required to operate the truck, maintenance ensures the vehicle is safe and functional for deliveries, and tolls are often unavoidable charges for using specific roads to transport goods, all of which are crucial for the driver to earn income.