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February 24, 2024 | read

Requirements to Deduct Business Expenses

Brandon Hall

Requirements to Deduct Business Expenses

It’s impossible to list all of the expenses that can be deducted through your business as there are too many.

In order for an expense to be deductible, it must be (IRC Sec. 162):

  • Ordinary and necessary
  • Current
  • Directly related to your business or rental activity; and
  • Reasonable in amount

To be ordinary and necessary, the expenses must be helpful and appropriate (Welch v. Helvering, 290 U.S. 111 (1933)). IRS Schedule C and E will give you ideas on what an ordinary and necessary expense is. But if you ever find yourself wondering whether any expenses is deductible, ask yourself “do other businesses in my field incur similar expenses?” (ordinary) and “is this a required expense and is it appropriate for my current business?” (necessary).

An example of an expense that would generally not pass muster is a $500 meal for you and a client. A business meal is ordinary, but a $500 meal is not likely necessary unless your business focuses on affluent clients.

Only items considered current will be deductible. If an expense will benefit your business or rental for multiple years, it may not be considered a current expense but rather a capital improvement and such an expense would not be fully deductible in the current year.

Directly related means that you cannot deduct personal expenses. The internet bill of your primary residence will not be directly related to your rental property operation (unless you have a home office).

An expense is reasonable in amount unless there are more economical and practical ways to achieve the same result. For example, I’m positive I can wine and dine a client for less than the $500 spent in the above example and achieve a great outcome. 

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