The IRS states that business expenses must be considered to be:

The IRS defines business expenses as those that are both "ordinary and necessary." This means that to qualify as a deductible expense, an item must be commonly accepted in the taxpayer's industry (ordinary) and helpful for the business's operations (necessary).

For instance, an ordinary expense for a bakery would include flour and sugar, while a necessary expense may encompass rent for the bakery space or utilities. The focus on these terms helps ensure that only legitimate business-related expenses are deducted, which aligns with the IRS's guidelines for determining the deductibility of costs incurred in the pursuit of income. This definition promotes a standard that aids both taxpayers and auditors in evaluating what constitutes a valid expense in business operations.