Expenses, (Necessary and Ordinary)

Necessary expense- appropriate and helpful in the development of taxpayer’s business.


Ordinary expense- normal or usual to the line of business and are appropriate/helpful in the development of the taxpayer’s business.

Business expense must be substantiated with (Rule of Substantiation)

1. receipts or adequate records
2. amount of expense
3. date and place of expense
4. purpose of expense
5. professional or business relationship of expense
otherwise, they should be disallowed

Representation and entertainment expenses, deductible if

1. used primarily for the furtherance of employer’s trade or business;
2. only to the extent allowable- directly related to the active conduct of the employer’s trade or business; and
3. subject to the rule of substantiation