Essentials of Federal Taxation
Quiz 9: Business Income, Deductions, and Accounting Methods
The Phase "Ordinary and Necessary" Has Been Defined to Mean
The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.
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Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.
The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.
Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.
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