Why the IRS calls business expenses ordinary and necessary—and what that means for your deductions

Let me explain a simple rule that sits at the heart of business deductions: the IRS wants expenses to be ordinary and necessary. That two-word filter is what separates a legitimate business deduction from something that doesn’t quite fit. If you’re sorting through receipts, invoices, and all those little daily costs, this is the lens to keep handy.

What does “ordinary” really mean?

First off, ordinary isn’t about being boring. It’s about being common in the kind of work you do. If you run a bakery, flour, sugar, eggs—your basic baking supplies—are ordinary because they’re routinely used by most bakeries. If you run a graphic design shop, printing paper, design software subscriptions, and stock imagery are ordinary because they’re routinely accepted as part of that line of work.

Think of it like this: would other businesses in your industry typically pay for this item to keep their doors open? If the answer is yes, that item passes the “ordinary” test. If the item is something wildly unusual for your field, even if it’s useful, it might fail the ordinary test. The idea isn’t to punish clever spending; it’s to keep deductions aligned with what peers in your line of work consider normal and expected.

What does “necessary” mean, then?

Necessary is about usefulness and appropriateness. An expense has to help you run your business or produce income. It doesn’t have to be essential in every sense, but it should be appropriate for your operations. In our bakery example, rent for the storefront or the commercial oven you depend on is a necessary expense—these are clearly tied to keeping the business open and able to bake and sell bread.

On the other hand, a luxury upgrade that doesn’t improve day-to-day operations could be seen as not necessary. If you’ve got a boutique bakery and you’re considering a high-end coffee machine for the break room that doesn’t affect production or sales, you’ll want to think carefully about whether it’s necessary for your business goals. The IRS wants to see a reasonable link between the expense and the business activity.

Why both tests matter

The beauty—and the guardrails—of the ordinary-and-necessary standard is that it’s strict enough to prevent personal spending from getting deducted, yet flexible enough to cover everyday business life. You don’t have to prove that every item is indispensable; you do have to show that it is something commonly used in your industry and that it helps your business operate.

Here’s a quick mental checklist you can use:

• Is this expense commonly paid by others in my industry?

• Will this cost help me run the business or generate income?

• Is the connection between the expense and my business clear and reasonable?

If you answer yes to both ordinary and necessary, you’re on solid ground. If there’s a doubt, pause and ask: would a peer in my field consider this a normal business expense?

A few concrete examples across different fields

• Bakery: Ordinary includes flour, sugar, yeast, and packaging; necessary includes the rent on the bakery space, utilities, and oven maintenance. A fancy storefront redesign? Might be ordinary in some contexts but still needs to show how it helps sales or efficiency.

• Freelance photographer: Ordinary could be camera lenses, memory cards, a sturdy tripod; necessary could be a reliable computer, editing software, and travel to shoots.

• Small tech startup: Ordinary might be cloud hosting, domain services, office printer ink; necessary would include a workspace lease, essential software subscriptions, and security measures.

• Home-based consultant: Ordinary could be a dedicated desk setup and office supplies; necessary would be a portion of home utilities if you’re claiming a home office deduction and any software that keeps client work flowing.

A few common pitfalls to avoid

• Personal expenses masquerading as business costs. If you buy something for personal use, don’t claim it as a business expense just because you used it for a quick work task. The IRS expects a clean line between personal and business purchases.

• Lavish or extravagant items that don’t fit the business. If an expense is extravagant for your industry or the scale of your operation, it may fail the “necessary” test.

• Mixed-use items without documentation. A laptop used for both work and personal tasks can still be deductible, but you’ll need to allocate the portion used for business clearly.

• Missing records. A deduction is much stronger when you can show receipts, invoices, and a clear business purpose for the expense.

Smart habits for staying in line with ordinary and necessary

• Keep receipts and notes. A simple note on what the expense was for and how it supports the business helps when you’re reviewing records or answering questions later.

• Separate business accounts when possible. A dedicated business credit card or checking account makes it easier to separate ordinary and necessary business costs from personal spending.

• Log mileage and travel costs. If you drive for meetings or client visits, maintain a mileage log and keep receipts for tolls and parking. Travel expenses can be deductible if they’re tied to business activities.

• Use reasonable allocations for mixed-use items. If you use a home office or a device for both personal and business tasks, do a sensible split and document how you arrived at the business portion.

• Review regularly. As your business evolves, what’s ordinary and necessary can shift. A quarterly look at your expense categories helps keep deductions aligned with reality.

Why this standard matters beyond numbers

This isn’t just about saving a few dollars on a tax return. It’s about clarity—for you and for any reviewer (think of auditors or tax professionals). When you can articulate why an item is ordinary in your industry and necessary to your operation, you’re building a transparent case for why that cost belongs in the business books. It’s a practical framework that helps maintain accountability, reduce gray areas, and keep your financials readable and trustworthy.

The practical takeaway in one line

If your expense is something other businesses in your field would regularly pay, and it helps your business run or grow, it’s likely ordinary and necessary. If not, it deserves a closer look or a different accounting treatment.

A quick note on context and nuance

Real-world scenarios aren’t always black and white. Some items walk the line between ordinary and extraordinary in a given year. For instance, a software upgrade designed to improve security might be ordinary for a tech firm but could be a stretch for a tiny side gig unless security is central to the service offered. In those moments, it helps to lean on documentation that ties the expense to a specific business activity and outcome.

Where to start if you’re organizing your records

• Create a simple expense map. Group costs by their function in the business: supplies, rent, utilities, marketing, travel, and equipment. It’s a breeze to see where your ordinary-and-necessary costs live.

• Tag items by industry norms. A quick note like “standard in bakery operations” next to a receipt can save time and reduce questions later.

• Keep a running diary of business activities. A short log that links a purchase to a project, client, or revenue outcome can be invaluable if you ever need to explain how a cost supported income.

If you’re exploring topics that touch this rule, you’re tapping into a cornerstone of practical tax understanding

Understanding ordinary and necessary isn’t about memorizing a single definition; it’s about seeing how the pieces fit in real life. It’s the same instinct you’d use when organizing a small business—making sure every dollar has a job, and that job makes sense. When you can explain that a purchase serves a routine function in your field and advances your business, you’re already speaking the language of sound financial management.

And yes, this concept frequently crops up across tax education, including programs and courses that break down how businesses stay compliant while growing. You’ll notice the pattern: the IRS isn’t trying to catch you out with trick questions; they’re guiding you toward responsible decision-making about what truly supports income generation and daily operations.

A closing thought

In the end, ordinary and necessary is less a rigid checklist and more a practical compass. It helps you decide what belongs in the business books and what doesn’t. It keeps your records honest and your deductions defensible. It’s the kind of rule that, once you internalize it, makes the day-to-day grind a little clearer and a lot more manageable.

If you ever feel stuck, pause and apply the two-question test: Is this expense common in my industry? Does it help my business run or grow? If the answer is yes to both, you’re likely looking at a legitimate deduction. And if you ever want to sanity-check a messy receipt stack or a surprising cost, a quick chat with a trusted tax professional can make a world of difference.

So, next time a receipt lands on your desk, ask yourself: is this ordinary in my field, and is it necessary for my business to operate? If the answer is yes, you’ve likely found another honest, deductible cost—and you’ve kept your financial ship steady and straight.