In general, “ordinary and necessary expenses” paid or incurred during the taxable year in carrying on a “trade or business” are deductible on Schedule C of a tax return or on a business return such as a corporate return, IRS Form 1120. The definitions are fairly common-sense: “Ordinary” means common and accepted and “necessary” means appropriate and helpful.
In some instances, the IRS may assert that, although an expenses is ordinary and necessary, certain activities, e.g., gambling, do not typically rise to the level of a “trade or business” and, therefore, the expenses are not “business” expenses. To be engaged in a “trade or business” for purposes of Schedule C requires that your primary purpose for engaging in the activity must be for income or profit and, generally, continuous and regular involvement.
However, there are instances a taxpayer is carrying on a trade or business that does not generate regular income or is a type of activity that does not require continuous labor, but may still be considered a “trade or business.” Neither congress nor the IRS have delineated a hard-and-fast rule as to what constitutes a “trade or business” but most people know one when they see one, and the Supreme Court has similarly deferred to “a common-sense concept of what is a trade or business, allowing a gambling to be a “trade or business” where it was what “he did what he did for a livelihood.”
Because this is a gray area in the law, the IRS can sometimes take over-aggressive positions and deny proper trade or business expenses in an audit. If you need help defending your business expense deductions in an IRS or California FTB audit, do not hesitate to call our Orange County tax attorney firm at (949) 397-2292.