Deductible business expense is a very broad category of deductions allowed for businesses because the Internal Revenue Service (IRS) tries to tax business profits, not revenue. Deductible business expenses has been given a broad definition with courts allowing any expense that is “ordinary and necessary” for the producing income. Congress specifically decides that some expenses cannot be deducted or others must be done in a different way. Many expenses necessary for business operations such as those from driving to work cannot be deducted because of a specific code. Others like major equipment must be capitalized and depreciated over time.
While broad, ordinary and necessary have their limitations. Most expenses that courts find to not meet the ordinary and necessary threshold are either odd for the industry of the business or far removed from profit objectives. For example, while it may be an ordinary expense for a movie theater to have games in the lobby, a court may find an expense for arcade games to be odd for a bank. A court likely would find that, while potentially beneficial to generating profit, political donations by a corporation would not be necessary. The IRS and courts generally do not deny business expenses, besides those specifically disallowed by statute, that naturally flow from the particular activities and costs of the business’s industry.
See also: 26 U.S.C. § 162(a)
[Last updated in February of 2022 by the Wex Definitions Team]