The IRS notes that ordinary expenses are “common and accepted in your industry,” while necessary expenses are those that are “helpful and appropriate for your trade or business.” However, some types of common expenses, like those that factor into the cost of goods sold, are not considered ordinary and necessary and fall into different categories. And while many types of business expenses can be ordinary and necessary, the specifics can vary greatly among businesses. “It’s all relative," CPA Michele Cagan told The Balance by phone. “What’s ordinary and necessary for one business is not necessarily ordinary and necessary for another,” For example, Cagan noted that some business owners want to deduct dog food as an ordinary and necessary expense because they work from home with their pet or bring their dog to their office. But, generally, dog food would not be deductible, because it’s something that would be purchased personally, with or without the business existing. That said, dog food might be deductible as an ordinary and necessary business expense for some pet-oriented businesses, she said, like a veterinarian who supplies treats for patients. To be ordinary and necessary, “there has to be an obvious tie toward this expense trying to create income,” Cagan said. Keep in mind that an ordinary and necessary business expense does not have to successfully generate revenue, as long as there was reasonable intent to do so, she said, such as in the case of a marketing campaign that flops.
Reporting Ordinary and Necessary Expenses on Schedule C
If you’re an individual business owner, such as a sole proprietor—freelancers and gig workers, for example—you can typically claim ordinary and necessary business expenses on Schedule C. On this form, you can report how much you’ve spent within various categories, ranging from legal and professional services to deductible travel and meals. These expenses then offset the amount of revenue your business earned, which reduces your taxable income. However, the reductions aren’t always equal to the full purchase cost. For example, only 50% of the cost of business meals can generally be deducted. Plus, not all meals necessarily count as ordinary and necessary expenses. You can’t automatically deduct the cost of your daily lunch, for instance, just because you ate it at your desk, Cagan said. “Business meals have to have a business purpose…such as by meeting with a customer…where you’re furthering business [while] you’re having a meal,” she said. Also keep in mind that IRS forms might not specify whether something is an ordinary and necessary expense, but that doesn’t mean a business owner can’t claim the deduction, as long as they can justify it. “Just because something isn’t a line item on a tax form doesn’t mean you shouldn’t take it,” Cagan said.
Types of Ordinary and Necessary Expenses
Even though the meaning of “ordinary and necessary” changes depending on the type of business you have, there are some general categories of expenses that usually qualify:
Supplies for your officeRent you pay for your office or for a warehouseGas, electric, and water bills you pay for your officeRepairs and upkeep of business equipmentUniforms for employeesCourses required for professional certificationBusiness-related insuranceRetirement plans for employeesAdvertising
What Ordinary and Necessary Expenses Mean for Individuals
While ordinary and necessary expenses apply to business expenses, you may still want to understand this area if they have any income outside of their main employment. If you freelance, have a side hustle, or you’re thinking of starting your own business, it can be useful to know what’s tax-deductible. Because ordinary and necessary expenses can be somewhat subjective, however, you may want to consult with a tax professional who can help you decide whether something should be claimed. Doing so can help you deduct ordinary and business expenses you may not have realized are eligible, and it can also help you avoid claiming expenses that you aren’t allowed to.
