The IRS allows businesses to deduct expenses that are an ordinary and necessary part of conducting a business. One common question is if and how businesses can deduct executive perks such as private flights, corporate housing, memberships, and personal security details.

On Form 1120, these expenses usually fall under Line 26, other deductions. The IRS has multiple versions of Form 1120. Which ones companies use depends on how they're organized.

S-Corporations, for example, will fill out Form 1120-S. On this form, other deductions are on Line 20.

For all Form 1120, companies cannot simply provide a dollar amount of other deductions. They must also include a statement that itemizes these deductions. This document will be attached to Form 1120 when the form is submitted to the IRS.

What are Ordinary and Necessary Expenses?

Ordinary refers to expenses that are normal and expected for a business. What qualifies as ordinary can depend on the business's industry and purpose. Expenses don't have to be frequent or inexpensive to qualify.

Necessary means that an expense is helpful for a business. An expense doesn't have to be required or essential to qualify. Expenses simply need to have a legitimate business purpose.  

Corporations can deduct certain travel, meal, and non-entertainment expenses. They generally cannot deduct membership fees or purely entertainment expenses. For example, a company can deduct 50 percent of meals, so long as those meals aren't lavish.

Similarly, businesses can deduct necessary travel expenses. They cannot, however, deduct transportation expenses between someone's home and workplace.

The exception to the no-deduction rule is if an amount is treated as compensation. In these cases, nondeductible expenses may become deductible. The caveat is that certain executives, such as directors, may fall under the IRS's special rules.

In all situations, the key is to maintain records and documents that establish these deductions. Without documentation, the IRS may reject an otherwise valid deduction.

If you have questions about what qualifies as an ordinary and necessary expense for tax purposes, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.