What are ordinary and necessary expenses?

Ordinary and necessary expenses are expenses that are appropriate for your trade. For example, if you are a chef, the kitchen and kitchen utilities are appropriate. If you are a writer, office and computer expenses may be appropriate.

Business use of home expenses must meet these criteria to be deductible. In most cases, ordinary and necessary expenses will be easily identifiable. However, there may be some instances where it’s not as clear-cut. In these cases, you may need to dig a little more to determine if the expense is eligible for deduction.

There are a few things to keep in mind when identifying ordinary and necessary expenses. First of all, the expense must have a legitimate business purpose. It can’t be personal or something that is only used only for leisure activities. So a writer making lunch in the kitchen probably does not make kitchen expenses deductible.

Secondly, the expense must be helpful and appropriate for your business. Kitchen expenses are not “useful” in the writing “trade,” so the writer may not deduct them. They are useful to the chef’s “cooking” trade, so the chef may deduct them.

Finally, you may not deduct personal expenses as business expenses. This may seem obvious, but in a home setting where personal and business can mix fluidly, separating the two requires some discipline.

Types of expenses you may deduct

Here is an overview of the types of expenses that count as business use of home expenses and that you may be able to deduct.

Direct expenses

These expenses benefit only the area of the home that you use for business. These expenses might include furniture, painting, repairs, or upkeep of your home office. These expenses are fully deductible, but the area must be dedicated exclusively to your business.

Indirect expenses

These expenses include anything spent on running the entire home. Examples of indirect expenses include insurance, utilities, and general repairs to the home.

These expenses are deductible but only based on the percentage of the home you use for business purposes. So if you dedicate 10% of your home to your business, you can deduct 10% of these indirect expenses.


Basic local telephone service for the first telephone line to your home is not deductible, even if you use it for business.

However, any other business-related long-distance or second-line charges are deductible.


The IRS considers a home office “nonresidential real property.” Therefore you may depreciate the cost of that property over 39 years. To calculate the basis for the depreciation expense, you take the smaller of:

The fair market value of the home minus the fair market value of the land on the day you first used the home for business.


The home’s cost plus permanent improvements minus any casualty losses minus the cost of land on the day you first used the home for business.

Home improvements

Permanent improvements before using the home for business become a part of the basis for depreciation. So you will realize this as a depreciation expense over 39 years.

Once you start using the home for business, you deduct the cost of improvements separately.

There is not an easy rule for determining in all circumstances whether a business can deduct an expense in one year or whether you must depreciate it over 39 years; we can help you figure this out on a case-by-case basis.

Calculating the business use of home deduction

The key to calculating the deduction is defining the amount of the home you use for business. The “business percentage” is the square footage of the part of the home you use for business divided by the house’s total square footage. So if you have a 3000 square-foot house and a 300 square-foot office space dedicated to business, then your business percentage is 300/3000 = 10%.

You multiply this percentage times your indirect expenses and add this to your direct expenses to calculate your deduction.

You also have to consider time: if you only use the home for business for a part of the year, you only deduct expenses incurred during that part of the year. So, for example, if you only use your home for business in the winter, you would not deduct expenses you incur in the summer.

Daycare use, a common case

A common use of the home for business is using the home as a daycare facility. In this case, you calculate the business percentage by using the portion of the home regularly used for the daycare, divide it by the total square footage of the home, and multiply that by the percentage of time you use the home as a daycare facility.

In many cases, the basement and garage may be included in the total square footage of a daycare provider’s home when calculating the business use percentage. In addition to regularly used rooms, the business use area can include:

  • Entryways, halls, food preparation areas, and bathrooms.
  • Basements with laundry or tool rooms and storage areas.
  • A garage where a business car is parked or where you keep household tools, trash cans, or daycare items.

You should also keep a log of the time you spend conducting your daycare business, including dates and hours each person was in your care. Also include additional time spent organizing, preparing meals, and cleaning up.

Simplified option for a home-office deduction

If all of this sounds daunting, there is also a simplified option. You may calculate a standard home-office deduction of $5 per square foot you use for business, up to 300 square feet ($1,500).

If you opt for this simpler method, you will deduct any allowable homeowner expenses (such as state taxes and mortgage interest) on your personal return. Using the standard deduction also means you may not deduct a depreciation expense. Depending on your situation and expenses, the standard deduction may or may not make sense for you.

In closing…

If you use your home for business, deducting relevant expenses can have a significant impact on your taxes. Doing so does require record-keeping and calculation, but the tax savings can be well worth the effort.

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