Internal Revenue Code Section 162(a)

Section 162(a) of the Internal Revenue Code (26 U.S.C. § 162(a)), is part of United States taxation law. It concerns deductions for business expenses. It is one of the most important provisions in the Code, because it is the most widely used authority for deductions. If an expense is not deductible, then Congress considers the cost to be a consumption expense. Section 162(a) requires six different elements in order to claim a deduction. It must be an

These elements have been interpreted by the courts and administrative agencies to determine if an expenditure is deductible as a business expense.

In general, the expense should be routine and directly related to the business activity. Ordinary does not require be habitual or made often; the court only requires that the expense is one that is ordinary and necessary for that business. For example, in Welch v. Helvering, the United States Supreme Court found that payments must be both ordinary and necessary to be business expenses; it held that although payments made to a creditor by a taxpayer may have been necessary, they were not ordinary because the circumstances under which they were paid were outside the norms of conduct in society. The Welch case is frequently cited for its dictum describing the meaning of the term "necessary" in Section 162 as requiring that expenses merely be "appropriate and helpful [in] the development of the [taxpayer's] business."

In Jenkins v. Commissioner, the Tax Court determined that in order to determine if expenditures are deductible under § 162(a), the Court must first ascertain the motive of the taxpayer in making the expenditures, and then determine if there is a sufficient connection between the expenditures and his/her trade or business. If a taxpayer makes a payment to preserve his/her business reputation, it can be considered an ordinary business expense. However, if the expenses are inherently personal in nature, they are not deductible under section 162(a). In addition, the amount expended must be considered to be reasonable by the court; therefore, if compensation is deemed unreasonable, it exceeds the amount allowable under section 162(a)(1).

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