What Are Incidental Expenses?

What Are Incidental Expenses?

Let me explain incidental expenses directly: these are the gratuities and other small costs you incur while handling business. For instance, if you're an employee on a trip, taking a taxi from the airport to your hotel means tipping the driver or hotel staff—that's incidental.

Key Takeaways on Incidental Expenses

You need to know that incidental expenses are those minor additions to your main business costs, like tips. They're most common during work travel, tied to transportation, meals, and lodging. Whether you get reimbursed depends on your company's policy. For most individual taxpayers, miscellaneous expenses aren't deductible anymore. But if your employer reimburses them and keeps records, they can be tax-deductible for the business.

Understanding Incidental Expenses

Your company's employee handbook typically covers incidental expenses and the rules around them. These expenses get classified as business or personal, with limits on amount, quality, or quantity. Companies often set a per diem rate for travel or other business activities.

When it comes to reimbursement, procedures might require you to pay out of pocket, use a company credit card, dip into petty cash, or draw from an imprest account.

Important Facts on Reimbursement and Deductions

Here's something key: per diem rates get updated yearly by the General Services Administration for the continental U.S., by the Department of Defense for places like Alaska or Hawaii, and by the State Department for foreign locations.

As an employee, you might get reimbursed for miscellaneous expenses based on company policy—check your handbook. The employer can then deduct those, up to a per diem max that varies by area. But since 2018, most individuals can't deduct unreimbursed business expenses; only a few like Armed Forces reservists or qualified artists can.

Track every incidental expense carefully for accounting and taxes. Keep detailed records, summarize them in an expense report with receipts, and submit to your company. If you pay personally, get reimbursed by a separate check to avoid it being seen as taxable income.

Taxes and Deductions for Incidental Expenses

Tax treatment differs sharply between employees and businesses. Businesses reimbursing incidentals can deduct them up to limits, while individuals and sole proprietors can deduct some meals and direct expenses, but miscellaneous deductions ended for most in 2018.

How Businesses Deduct Incidentals

If your business reimburses travel expenses including incidentals, you can deduct the costs, but the daily total can't exceed the federal per diem rate, which ranges from about $64 to $309 depending on the region.

How Individuals Deduct Incidentals

Most of you can't deduct incidentals anymore, including unreimbursed ones, post-2018. Form 2106 used to handle this but now only applies to specific groups like reservists or artists. You can still deduct travel, gifts, car expenses, or other ordinary and necessary ones in your field—meals at 50% using standard or actual costs. Deduct up to $5 for incidentals only if you skip meal deductions.

Incidental and Ancillary Expenses

Incidental expenses must be ordinary, necessary, customary, and reasonable to be deductible. They're often ancillary to gifts, like wrapping or delivery—these don't count toward the $25 per recipient gift deduction limit.

For casualties or theft, like a factory fire, incidentals such as medical treatment or temporary rent aren't deductible as losses.

National Guard and Reserve Travel

If you're in the National Guard or Reserves, you can deduct up to the federal per diem for meals, lodging, and incidentals for travel over 100 miles with an overnight stay to meetings, using Form 2106.

Tax Return Forms and Instructions

Check IRS Publication 535 for details on deductible business expenses. Sole proprietors use Schedule C with Form 1040, and its instructions list what you can deduct and any extra forms needed.

How Should You Pay for Incidentals on a Business Trip?

Payment depends on your employer's policy—submit receipts later, use a business card, or follow another method. Review the handbook or ask your supervisor before traveling to stay compliant.

What Counts As an Incidental Expense?

These are costs tied to bigger business expenses, like hotel tips, transport between hotel and meals, or mailing a business gift.

Incidental Costs in Construction

In construction, incidentals cover site purchase, grading, furnishings, equipment, design fees, insurance, and admin costs.

The Bottom Line

If you travel for a company, they might reimburse incidentals like tips; if not, you can't deduct them personally. Reimbursed ones are deductible for the business up to limits. As a self-employed person, deduct ordinary and necessary expenses within rules.