If a contract with a client requires me to spend money, is that money a business expense?

My small business is looking to acquire a new client, but the contract would
require that some of the money we receive would be spent to complete with the
contract. Does that constitute a business expense, or would I be taxed on the full
amount of the income?

Asked on July 10, 2017 under Business Law, Utah


M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

To be deductible, a business expense must be both "ordinary and necessary". An ordinary expense is one which is both common in your specific trade or business. A necessary expense is one which is helpful and appropriate for your trade or business. Therefore, any amounts legitmately spent that meets the above criteria is deductible. Specifically, in your case, any sums paid to complete the contract.

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

Yes, any amounts you spend, whether pursuant to a contract or otherwise (e.g. without a contract, just because it is appropriate or a good idea) which are legimately for business (to buy inventory, to provide services, etc.) is a business expense and is tax deductible. So say you are paid $30k but have to spend $6k to complete the contract. You net taxable income would be $30k - $6k = $24k.

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