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Chapter 5: Business Deductions

5-1 OVERVIEW OF BUSINESS DEDUCTIONS The Code does explicitly allow the deduction of expenses incurred in a trade or business, but only if those expenses are ordinary, necessary, and reasonable in amount. 5-1a Ordinary and Necessary Requirement Section 162(a) permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. To understand the scope of this provision, it is critical to understand the meanings of the terms ordinary and necessary. Since these terms are not defined in the Code or Regulations, the courts have dealt with these terms on numerous occasions. An expense has been held to be ordinary if it is normal, usual, or customary in the type of business conducted by the taxpayer.  Note that an expense need not be recurring to be considered ordinary. For example, a business may incur an expense related to a rare and unusual event. However, if other businesses in a similar situation are likely to incur a similar expense, the...
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Chapter 4: Gross Income

4-1 The Tax Formula 4-1a Components of the Tax Formula Income (Broadly Defined) This includes all of the taxpayer’s income, both taxable and nontaxable. Although it essentially is equivalent to gross receipts, it does not include a return of capital or borrowed funds. Exclusions For various reasons, Congress has chosen to exclude certain types of income from the income tax base. The principal income exclusions that apply to all entities (e.g., life insurance proceeds received by reason of death of the insured and state and local bond interest) are discussed later in this chapter, while exclusions that are unique to individuals are addressed in Chapters 9 through 11. Gross Income Code § 61(a) provides the following definition of gross income . Except as otherwise provided in this subtitle, gross income means all income from whatever source derived. Code § 61 provides perhaps the broadest definition of gross income possible. All income is taxable unless the Code says it is not. However, ...
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