What Are Incidental Expenses (IE)?
Incidental expenses are gratuities and other minor costs that are incurred while conducting business. They are incurred in addition to major expenses such as hotel fees and ticket prices.
Incidental expenses ancillary to the costs of transportation, meals, and lodging are common when an employee travels for business. An employee who takes a taxi from the airport to a hotel will incur expenses for taxis and hotels and incidental expenses such as tips to the taxi driver and hotel staff.
Other minor expenses like haircuts or toiletries are likely to be categorized as personal since they would have been needed and paid for at home anyway.
- Incidental expenses are minor costs, such as gratuities, that are incurred in addition to business expenses.
- Incidentals ancillary to the costs of transportation, meals, and lodging are most common when an employee travels for work.
- Reimbursement of incidental expenses, if any, is a matter of company policy.
- "Miscellaneous" expenses are no longer deductible by most individual taxpayers.
- Incidentals may be tax deductible by an employer if they are reimbursed by the company and proper records are kept.
Understanding Incidental Expenses
Incidental expenses and the policies and procedures governing them are usually covered in a company’s employee handbook. Incidental expenses will be categorized as business or personal, and limited in quantity, quality, or dollar amount. Companies may set a per diem rate for employee expenses incurred while traveling or otherwise conducting business.
Company procedures for reimbursement may?require incidental expenses to be paid:
- By employees out of pocket
- By a company credit card
- Out of petty cash
- From the company's imprest account
Per diem rates are set each year by the General Services Administration (GSA) for destinations within the Continental U.S.; non-foreign rates (e.g., Alaska, Hawaii, Puerto Rico, and Guam) are set by the Department of Defense and foreign rates (anywhere outside the U.S. and its territories) are established by the State Department.
There are several key facts regarding miscellaneous business expenses and how they are reimbursed or deducted at tax time:
- An employee may be reimbursed by his or her employer for miscellaneous expenses. This is a matter of company policy and should be outlined in the employee handbook.
- The employer can deduct miscellaneous expenses that have been reimbursed, up to a per diem maximum that varies by region.
- Most miscellaneous deductions for individuals, including unreimbursed business expenses, were eliminated with the tax reform act that went into effect in 2018. They remain available to only a few taxpayers such as Armed Forces reservists, local government officials, and qualified performing artists.
Company procedures should include rules for tracking incidental expenses for accounting and tax purposes. Employees need to keep detailed records of every purchase. Employees should summarize these records in an expense report backed by actual receipts evidencing payment and submit them to the company.
Incidental expenses paid by employees personally should be reimbursed by stand-alone check so that it is clear that the payments are reimbursements and not taxable income to the employee.
Taxes and Deductions for Incidental Expenses
The tax treatment of incidental deductions is very different for employees and for the companies they work for.
Businesses that reimburse their employees' incidental expenses may deduct them, up to limits. Individuals and sole proprietors may deduct the costs of some meals and other direct business expenses, up to limits. However, "miscellaneous" expense deductions were eliminated for the vast majority of taxpayers with the tax reform measures that went into effect in 2018.
How Businesses Deduct Incidentals
Businesses that reimburse employees for their travel expenses can deduct the costs.
Those costs can include “incidentals,” but the entire daily amount cannot exceed a federal per diem rate. This rate varies by region from about $64 to about $309.
How Individuals Deduct Incidentals
Most individuals can't deduct incidentals from their taxes, including unreimbursed employee expenses, since the changes to the tax law went into effect in 2018.
Form 2106 was formerly used to report "miscellaneous" itemized deductions but those have been eliminated for most individuals. A few professionals including Armed Forces reservists, some performing artists, and some state and local officials, can still use Form 2106.
Individuals and sole proprietors can still deduct other expenses, such as travel, gift, and car expenses, and such other expenses as are "ordinary and necessary" in their industries. Generally, only 50% of meal costs are deductible, using either a standard deduction or itemizing actual costs.
You can deduct up to $5 for "incidental expenses" only if you do not deduct the costs of meals.
The tax treatment of incidental expenses paid or reimbursed by businesses varies by type and taxpayer. As a general matter, incidental expenses may be deductible if they are ancillary to business expenses that are:
- Ordinary and necessary to their respective business activities
- Locally customary and expected
- Reasonable in amount
Incidental and Ancillary
Incidental expenses ancillary to the costs of gifts are common when a company gives gifts to its customers. A company that gives such gifts will incur incidental expenses such as wrapping paper, ribbons, bows, and delivery in addition to the cost of the underlying gifts.
Incidental expenses of business gifts such as gift-wrapping, engraving, packaging, mailing, insurance, or other related costs that don't add substantial value to the gift are not counted when figuring the deduction limit for business gifts. That's a good thing since business gift deductions are limited to $25 per recipient during each tax year. Any expense above $25 of any gift given to a recipient can’t be deducted.
Incidental expenses ancillary to the cost of damaged or stolen property are common when a company experiences a business casualty or theft. If a factory burns down, the company that owns it will have to pay to repair or replace the factory and could also incur incidental expenses like medical treatment for personal injury, moving and storage costs, or rent for temporary factory space.
Incidental expenses from a casualty or theft, such as medical treatment for personal injury, temporary housing, fuel, moving, or rentals for temporary living quarters, are not deductible as casualty losses.
National Guard and Reserve Travel
National Guard and Reserve members may claim an above-the-line deduction from gross income up to the federal per diem rate for meals, lodging, and incidental expenses of travel over 100 miles with an overnight stay to attend Guard or Reserve meetings. They are among the few individual taxpayers still eligible to deduct some incidentals using Form 2106.
Tax Return Forms and Instructions for Incidentals
IRS Publication 535 reviews common business expenses and has details of expenses that are and are not deductible. It lists other forms that might be needed for certain expenses.
Schedule C Profit or Loss From Business is the main form used by sole proprietors to record business expenses. This is attached to Form 1040.
The IRS Instructions for Schedule C detail what expenses are deductible. The instructions include a list of additional forms that may be needed if you?itemize deductions, depending on what business you're in and what type of expenses you have.
How Should I Pay for Incidentals On a Business Trip?
How you should pay for incidentals on a business trip will depend on your employer's reimbursement policies. Your employer may require that you submit receipts after the fact, use a business credit card for all expenses, or have an entirely different policy. You will need to check the employee handbook ahead of your trip or talk to your supervisor to ensure that you comply with all company policies.
What Counts As an Incidental Expense?
Incidentals are costs related to other, larger business costs. These include expenses such as fees and tips to hotel staff, transportation between your hotel and a meal, and the cost of mailing a business-related gift.
What Are Incidental Costs in Construction?
Incidentals are common in the construction industry. They typically include certain expenditures related to the site purchase, grading or improvement of the site, original furnishings, equipment, machinery, or apparatus, or professional design or legal fees, insurance during construction, and general administrative costs.
The Bottom Line
If you work for a company and travel on business, your employer may or may not reimburse you for incidental expenses like tips or unexpected small purchases. If not, you're pretty much out of luck when it comes to deducting these costs from your taxes. If your employer does reimburse these expenses, they can be deducted from the business's taxes up to a certain amount.
If you're self-employed or a sole proprietor, you may still be able to deduct some incidental expenses, within strict limits. Your "ordinary and necessary" expenses are deductible.