The Ordinary & Necessary Test: Stop Leaving Money on the Table
Every year, thousands of small business owners pay more taxes than the law requires. Not because they're careless, but because they were never taught the actual rules. Stephen Fishman's Deduct It! solves one specific problem that most tax guides skip over: most entrepreneurs don't lose money by claiming deductions they shouldn't, they lose it by failing to claim deductions they absolutely can.
The single biggest lesson in the book isn't a list of what you can deduct. It's the universal filtering mechanism that tells you whether any expense—obvious or unusual—qualifies as a legal business deduction. That mechanism is the "ordinary and necessary" test, and learning to apply it this week will change how much you keep from your business income.
What "Ordinary and Necessary" Actually Means (And Why It Matters More Than You Think)
The IRS allows you to deduct any business expense that meets two criteria simultaneously:
- Ordinary: It's common and accepted in your industry or profession
- Necessary: It's useful and appropriate for operating your business and generating income
This is not complex accountant language. It's a practical filter you can apply to almost every business expense in real time. The power of understanding this lies not in discovering exotic deductions, but in recognizing that nearly everything you spend money on in the course of your work deserves evaluation before you decide whether it counts.
Fishman emphasizes that this test is the universal standard. It applies whether you're a consultant claiming office supplies, a freelancer deducting part of your home, a coach purchasing professional development, or a creator buying equipment. The same rule works across every business model and income level.
Where most business owners fail is not in understanding the rule—they fail in applying it consistently and documenting it in the moment.
The Hidden Cost of Not Using This Filter
Imagine your tax situation this way: You earn $100,000 in business income. You spend $35,000 on legitimate business expenses throughout the year—software, equipment, professional services, a portion of your home office, travel to client meetings, meals with prospects. But because you never established a system to identify which expenses are ordinary and necessary, you only deduct $18,000 on your tax return.
That $17,000 gap costs you real money. If you're in the 24% federal tax bracket (plus self-employment tax and possibly state tax), that gap costs you roughly $5,100 in taxes you didn't need to pay. Over five years, that's $25,500 left with the government.
Fishman's core insight is this: the money isn't in finding secret deductions. The money is in not abandoning the legal deductions you already have the right to claim.
The Three-Step System to Apply This Week
Step 1: Audit Your Last 30 Days of Spending
Pull up your bank statements and credit card transactions from the last month. For each business-related expense, write one sentence next to it describing its business purpose. You're not looking for perfection—you're measuring how many legitimate deductions you've been overlooking.
This single exercise typically reveals that 40-60% of business owners leave legitimate deductions unclaimed simply because they never wrote down the purpose at the time of purchase.
Step 2: Create a Simple Documentation System Starting Today
Open a folder on your phone or computer labeled "Business Expenses 2024." Scan or photograph the three most recent receipts from your business spending. Make this a habit before the week ends. The goal is not elaborate bookkeeping—it's creating a contemporary record that proves business purpose when you need it.
Fishman stresses that the IRS favors documentation created at the time of expense, not reconstructed later. A receipt with a handwritten note about business purpose written today is infinitely more credible than one you explain three years later during an audit.
Step 3: Calculate Your Real Savings and Make It Concrete
Find your marginal tax rate (what percentage you pay on each additional dollar earned). Multiply that by your business expenses from last month. That number is the real money you save or lose based on how well you document and claim deductions.
If you spent $3,000 on business expenses last month and you're in the 32% combined tax bracket, correctly claiming those deductions saves you $960. Failing to claim them costs you that $960. Making that calculation concrete motivates the system-building that Fishman emphasizes throughout the book.
Why This Test Protects You During an Audit
The ordinary and necessary standard isn't just a way to identify which expenses to claim—it's your defense during an IRS audit. When an auditor questions a deduction, you don't win by arguing that you think it should be allowed. You win by showing:
- Documentation that proves the expense happened
- Evidence that it's common in your specific industry
- A clear business purpose written down at the time of the expense
This is exactly why Fishman devotes chapters to establishing that you're operating a legitimate business (not a hobby) and maintaining contemporaneous records. The ordinary and necessary test only protects you if you've documented it.
A consultant who can show that $500 annual software subscriptions are standard in their field and writes "project management tools—essential for client delivery" on the receipt has protection. One who deducts it without documentation has nothing.
The Distinction That Changes Everything
Fishman makes clear that applying the ordinary and necessary test consistently is not tax avoidance or aggressive interpretation. It's exactly what the tax code allows. The difference between a business owner who pays $8,000 more in taxes than required and one who doesn't pay a penny more comes down to one discipline: evaluating each expense against this filter and documenting the result.
Most small business owners have already spent the money. They're already driving to client meetings, buying professional tools, maintaining their workspace. The question isn't whether they can afford these expenses—they've already paid them. The question is whether they're claiming the deductions the law allows them to claim.
The ordinary and necessary test answers that question in real time, before you file, before any audit threat exists.
What Changes This Week
You don't need to reorganize your entire business. You don't need new accounting software or a bookkeeper. You need three habits installed immediately:
- Ask yourself: Is this ordinary in my industry and necessary to generate income?
- Document the business purpose when the expense occurs, not later
- Organize receipts in a way you can find them if questioned
Implement these three steps this week and you've installed the single most valuable lesson from Deduct It! The money you save in reduced taxes—and more importantly, the stress you eliminate by having documentation ready—pays for the book's price thousands of times over.
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