Incidental ExpensesDefined along with examples and more

In the course of doing business, you may come across expenses that are too minor in amount.

For example, when an employee travels for business purposes, s/he will most likely pay for tips to taxi drivers and hotel staff.

Say the employee had the hotel’s bellboy carry his/her luggage to his/her room.

The employee will then have to pay the bellboy a tip for his service.

However, the amount of the tip may be too minimal to warrant a receipt.

For another example, let’s say that you want to give a gift to a business client.

In preparing such a gift, you incur minor expenses such as the cost of the gift wrapper or carrying bag.

We refer to these expenses as incidental expenses or incidentals.

Now, one might think that these expenses are unnecessary and shouldn’t count as business expenses.

While that may be true for some incidental expenses (those that are personal in nature), they are oftentimes unavoidable and necessary.

For most states in the US, tipping is customary to the point that those who work within the hospitality industry expect to receive them.

As such, rather than treat them as unnecessary, most businesses incorporate them into their other expenses (e.g. travel expenses, entertainment expenses, etc.).

Some may even have policies in place for incidental expenses.

In this article, we will be exploring incidental expenses.

How does one account for them?

Should one treat them just like any other expense?

Should they still have proof of payment no matter the amount?

Do all incidental expenses count as official business expenses?

We’ll try to answer these questions as we go along with the article.

What are Incidental Expenses?

To better understand incidental expenses, let’s first start with defining the term “incidental”.

According to the Merriam-Webster dictionary, incidental means occurring merely by chance or without intention or calculation.

The Cambridge dictionary defines incidental as happening by chance or in connection with something of greater importance.

With these definitions, we can infer that incidental expenses are expenses that a business incurs by chance.

Or they could be expenses that a business incurs in connection with another greater expense (e.g. travel expenses).

For example, if an employee uses the services of a taxi cab, s/he may have to pay a tip to the driver in addition to the taxi fare.

The tip that the employee will pay to the driver is an incidental expense.

The reason is that it will only be incurred in connection to another greater expense, which is the taxi fare.

Because incidental expenses are often minor in amount, they are either incorporated into other greater expenses such as travel and accommodation expenses or lumped together as “other expenses”.

In addition to that, since they’re so small, businesses tend to pay for them with cash.

A business may enact policies that cover incidental expenses.

For example, a policy may identify what incidental expenses an employee can reimburse when s/he travels for business.

It may also include a limit to the reimbursable amount.

A policy may also categorize incidental expenses into business and personal expenses.

Or the business may provide a daily per diem rate depending on where the employee travels.

This per diem will cover all meal expenses as well as any incidental expenses that the employee incurs during a business travel.

Any amount in excess of the per diem amount becomes the personal expense of the employee.

The Types of Incidental Expenses

There are primarily three types of incidental expenses: employee-related expenses, business-related expenses, and management-related expenses.

Employee-Related Expenses

Sometimes, employees may incur minor expenses as they do business functions.

These usually occur during employee business trips. These incidental expenses belong to the employee-related expenses category.

Some examples of employees-related incidental expenses include:

• Tips to hotel staff
• Tips to baggage carriers
• Food/Meals
• Toll fees
• Tips to the cab driver
• Laundry services
• Other minor expenses that an employee incurs during business travel

It’s important to distinguish what’s a legit employee-related expense from what’s not (i.e. personal expenses of the employee).

For example, during the course of his/her travel, an employee may avail of the services of the masseur.

The cost of such a service is not a legit employee-related expense even if s/he incurs it during his/her business travel.

Rather, it is a personal expense since it does not relate to any business activity. It only benefits the employee.

Business-related Expenses

The incidental expenses that a business incurs when it gifts anything to its clients are what we refer to as business-related incidental expenses.

For example, the cost of wrapping paper, ribbons, carrying bags, delivery, etc.

Minor expenses that the business incurs for an employee’s birthday celebration may also qualify as business-related incidental expenses.

There’s a deduction limit to business gifts, which, as per IRS, is only $25 per recipient per year.

Any amount that is in excess of such a limit is automatically non-deductible.

However, business-related incidental expenses don’t count toward such a limit.

As long as it doesn’t add substantial value to the gift, it won’t count when considering the deduction limit of gifts.

Some examples of business-related incidental expenses include:

• Delivery/transportation of the gift
• Gift packaging (e.g. carrying bag)
• Gift wrappers
• Engraving
• Insurance

Management-related Expenses

A business may sometimes incur minor expenses to entertain and encourage its employees.

For example, the business may pay for newspapers, food during business meetings, laundry services, etc.

We refer to these expenses as management-related expenses.

They serve to increase the morale of the business’s workforce.

Some examples of management-related incidental expenses include:

• The cost of candies located on the reception desk
• Coffee in the pantry
• Newspapers and magazines for employee consumption
• Meals during official business meetings

Accounting For Incidental Expenses

Because of how minor in amount incidental expenses typically are, they don’t usually come with receipts. Securing receipts for such small amounts tend to be difficult and impractical.

Can you imagine asking for a receipt for the tip you paid to the bellboy?

As such, when employees apply for the reimbursement of incidental expenses, they usually are not required to present receipts for such payments.

Although, this also makes the auditing of incidental expenses impractical.

Depending on the nature of the incidental expense, it may be incorporated into another expense account, or be lumped with other incidental expenses as “other expenses”.

For example, incidental expenses related to business travel such as tips paid to hotel staff and valets may be included in the “travel expenses” account.

It should be noted however that the personal expenses of an employee do not count as incidental expenses.

Due to how incidental expenses usually don’t require receipts, there is a risk of fraud.

An employee may claim bogus incidental expenses since s/he knows s/he doesn’t have to present a receipt for them.

To combat this, a business may include a limit on how much incidental expenses an employee can claim for reimbursement.

Also, conducting occasional audits of expense reports can help.

Tax Treatment of Incidental Expenses

As a general rule, the IRS allows incidental expenses as deductions.

However, such expenses must meet the following criteria:

• They are ancillary to ordinary and necessary business expenses
• They are locally customary and expected; and
• Their amounts are reasonable

The IRS imposes a limit of $5 per day for incident expenses related to travel.

However, it only applies if no meal expenses were paid or incurred and the standard meal allowance was not used.