Question

List the four requirements for an amount to be deductible pursuant to IRC § 162.

Answer 1

The four requirements for a business expense to be deductible under IRC § 162 are that it must be ordinary, necessary, reasonable, and paid or incurred during the taxable year.

Step-by-step explanation:

To qualify as deductible under Internal Revenue Code (IRC) § 162, an expense must meet four specific requirements. These requirements are essentially meant to differentiate between personal expenses and those that are strictly related to conducting business.

1. The expense must be ordinary in the taxpayer's trade or business.
2. The expense must be necessary for the taxpayer's trade or business.
3. The expense must be reasonable in amount.
4. The expense must be paid or incurred during the taxable year.

An 'ordinary' expense is common and accepted in the taxpayer's field. A 'necessary' expense is one that is appropriate and helpful for the business. The concept of 'reasonableness' is more subjective and often depends on the circumstances surrounding the expense, taking into consideration factors like amount, purpose, and relations to non-employees. Lastly, to be deductible within a given tax year, the expense must have been paid or incurred in that year.