Business expense deduction

[Debbie Campbell]

Client is forming new business: will have gross income receipts of
$3million and will need to pay out to associates $500,000. Questioning
the deductibility of this and best type of entity...Client is actually on w-2
for a company in which he owns an interest along with the above mentioned associates. Client is actually working 100% on his new business while receiving a w-2 from affiliated company. The "Quid-Pro-Quo" arrangement is that he needs to kick back part of the proceeds on this seperate business activity to the other associates. The problem is they are performing no services for this payment and I am concerned about the deduction being for "ordinary and necessary"
business exense. Suggestions???

[Nashville]

Deduct

While this arrangement sounds strange, I would venture that a payment made to satisfy a contractural requirement should not fail the "ordinary and necessary" requirement.

Lots of wasteful, inefficient, and even stupid spending is not "ordinary and necessary", especially in retrospect, but that doesn't mean these things are not deductible. This requirement is applied by auditors in extreme and obvious cases of personal and/or business self-aggrandizement.

[don't know if that one is in the dictionary or not, but I think you get the picture]