What Exactly Can A Business Deduct? Thanks to Two Adjectives, Practically Anything

 
§162 grants taxpayers the right to deduct ordinary and necessary business expenses.  162’s text, however, requires us to open a few reference books to completely understand its statutory intent.  Here’s the section’s opening sentence:

1. In general: There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including ...
   

 
The word “there” has several grammatical functions; here, it’s used as a pronoun to, “introduce a clause or a sentence.”[1]  A more precise definition is to describe it as a, “dummy subject” used to, “assert existence” or “introduce a topic.”[2]  The sentence contains the verbal phrase, “shall be allowed.”  Shall is a used as a substitute for “will,” a common scheme used in legal writing.[3]  “Will” is an auxiliary verb signifying the future tense while “allow” means, “To let do or happen.”[4]  This phrase grants the taxpayer permission to deduct “ordinary and necessary expenses.”
 
An “ordinary” expense is “common,”[5] “normal, or usual,”[6] while a “necessary” expense is, “required to be done”[7] or “needed.”[8]The former implies temporal regularity while the latter connotes an unavoidable disbursement.  The combined effect of these two adjectives is to grant the taxpayer broad authority regarding deductions.There are few standard or extraordinary expenses a skillful lawyer couldn’t argue weren’t described by either adjective – an interpretation supported by the Treasury Regulations:
 
Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except items which are used as the basis for a deduction or a credit under provisions of law other than section 162. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. See paragraph (a) of § 1.161-3. Among the items included in business expenses are management expenses, commissions (but see section 263 and the regulations thereunder), labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business (see § 1.162-2), advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.[9]


[1] American Heritage Dictionary, 2nd College Edition, p. 1261, © 1985

[2] The Merriam Webster Dictionary of English Usage, p. 899, © 1989

[3] The Chicago Manual of Style, 16th Edition, p. 237, © 2010

[4] American Heritage at 96. 

[5] American Heritage, p. 875

[6] Concise Oxford English Dictionary 11th Edition, p. 1007, © 2004

[7] Oxford at 956

[8] American Heritage at 834

[9] Treas. Reg. 1.162-1(a)