Ordinary and Necessary Business Expense

Section 162 trade or business

Determining the deductibility of a trade or business expense has consistently remained one of the top ten most litigated issues before the U.S. Tax Courts and is important to businesses of all sizes. Under § 162 of the Internal Revenue Code (IRC), an expense is deductible if it is an ordinary and necessary one incurred in the carrying on of a trade or business.Much litigation arises from these key elements, namely the expense’s ordinariness and necessity, and also whether the taxpayer is engaged in a trade or business.

This primer focuses on the first two elements, ordinary and necessary, and explains how an expense may be deducted with regard to the applicable legal tests.

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