Monday, February 18, 2013

Key Concept for Deductibility: "Ordinary and Necessary"



Key Concept for Deductibility: "Ordinary and Necessary"

Whenever they talk about business expenses, the IRS applies the test of “ordinary and necessary.” If the type of expense you’re claiming is something that your professional peers usually incur in their work, and if the amount of the expense is in line with what others at your level in your profession can be expected to spend, then the expense can be considered "ordinary." If the expense is helpful in maintaining or advancing your ability to pursue your career, then it can be deemed "necessary." Here’s how the IRS describes "ordinary and necessary." This paragraph (sometimes with slight variations) appears in many places in IRS forms and publications:

“An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.”

For example, if you or I were to hire a limousine and a driver to get to a voice job, that’s not necessary and it certainly isn’t ordinary. But the late great voice talent Don LaFontaine used to do just that. He hired a limo to take him from job to job, because he was so busy that he didn’t have time to park his car! In his case, I’m sure he could demonstrate that to pursue his career at that level, it was necessary for him to pay for that special transportation assistance. Later on, of course, Don installed a state-of-the-art studio in his house – another reasonable and increasingly commonplace expense for successful voice talents.

As you go over your professional expenses, keep in mind that to be deductible, your expenses must meet the tests of being both ordinary and necessary.  Chapters 7 and 8 of The Actor’s Tax Guide discuss an actor’s deductible expenses in detail.  Find it at www.ActorsTaxGuide.com.

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