DEFINITION of 'Ordinary And Necessary Expenses - O & NE'

Expenses incurred by individuals for their business or primary employment. "Ordinary and necessary" expenses are categorized as such for income tax purposes, and these expenses are generally considered tax deductible in the year they are incurred.

These expenses are outlined in Section 162(a) of the Internal Revenue Code and must pass basic tests of relevance to business, as well as necessity.

BREAKING DOWN 'Ordinary And Necessary Expenses - O & NE'

This section of the tax code is the source of a large number of deductions by individuals, especially in years of transition between jobs or careers. Typical expenses that can be included in the "ordinary and necessary" group include a uniform for work, or business-related software purchased for a home computer.

Startup costs associated with setting up a new business may also be tax deductible, but typically must be spread out over several years; these costs do not qualify as ordinary and necessary for IRS purposes.

The IRS defines an "ordinary" expense as anything that is "common and accepted” to a specific trade or business. The IRS defines a "necessary" expense as anything that is "helpful and appropriate”, but not indispensable.  Key examples of “ordinary and necessary” business expenses include:

  • Employees Compensation: wages or salaries paid to employees for services rendered.
  • Retirement Plans: money allocated to employee-sponsored retirement plans such as 401(k), 403(b), SIMPLE (Savings Incentive Match Plan for Employees), and SEP (Simplified Employee Pension) plans.
  • Rental Expenses: money for a property a business owner leases but does not own. The rental expenditures are not deductible if the business owner receives equity in, or holds title to the property.
  • Taxes: any local, state, federal or foreign taxes paid that are directly attributable to a trade or business.
  • Interest: any interest expenses on money borrowed, to cover the costs of business activities.
  • Insurance: any type of insurance acquired for a professional business.

Business use of Your Home

Business owners may be able to deduct expenses related to the portions of their homes that are allocated toward business use. These expenses may include utilities, mortgage interest and repairs. But in order for business owners’ homes to qualify as deductions, they must prove their dwelling is their principle place of business—even if an individual conducts ancillary business at locations outside of the home. Furthermore, deductions for a home office are based on the percentage of a home that a business owner dedicates to business use, consequently, individuals who operate out of the home are responsible for making this calculation.

RELATED TERMS
  1. Business Interest Expense

    Business interest expense is the cost of interest that is charged ...
  2. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  3. Property Tax Deduction

    Property tax deduction refers to state and local property taxes ...
  4. Tax Deductible Interest

    The tax deductible interest is a borrowing expense that a taxpayer ...
  5. Interest Deduction

    Interest deduction causes a reduction in taxable income or revenues ...
  6. Administrative Expenses

    Administrative expenses are the expenses that an organization ...
Related Articles
  1. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  2. Tech

    Tax Tips for Deducting Investment Management Fees

    Investment expenses can be deducted from your taxes when three main criteria are met. Here's how they work to help you maximize your tax deduction.
  3. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  4. Taxes

    Top 10 Home Business Tax Tips

    If you work for yourself, make sure you are getting the most for your tax dollars.
  5. Small Business

    6 Tax Season Tips for Entrepreneurs

    Here are several tips for small business owners to meet their tax compliance needs.
  6. Taxes

    5 Overlooked Tax Deductions for Small Businesses

    It's easy for small business owners to miss a few tax write-offs. Here's where to find them.
  7. Taxes

    The Most Overlooked Tax Deductions

    The receipts you cram into your wallet could be replaced with cash come tax season.
  8. Personal Finance

    11 Tax Deductions You Can't Actually Write Off

    These are some of the most common tax write-offs that you can't really claim.
  9. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
RELATED FAQS
  1. What are the most common operating expenses for an online business?

    Learn about the common expenses of online businesses and find out about some of the tax implications of new business expenses ... Read Answer >>
Trading Center