No matter how much planning and consideration go into expense planning, it’s always possible for unexpected, extra costs to come up.
This is why successful budgeting and preparation isn’t about preplanning for every cost a business will incur, but rather knowing what unexpected costs could arise and how to adapt to them.
The main type of business expenses that crop up unexpectedly are called incidental expenses. And if you know what they are, how they happen, and how to adapt to them, you’ll build better budgets that keep costs in check and maximize tax deductions.
What are incidental expenses?
Incidental expenses are minor, often unplanned costs that occur during business activities—for example, tips, parking fees, or laundry charges while traveling. Unlike larger, planned expenses, these small costs are usually covered by a per diem allowance. While they may seem insignificant, tracking and managing incidental expenses matters, since they can accumulate over time and affect a company’s overall budget.
Often, incidental expenses arise during business travel, like tips on meals or hotels, unexpected repairs, or additional fees on services. While these expenses are not planned for, they’re still necessary for conducting business.
What are the types of incidental expenses?
Incidental expenses can be categorized into three distinct groups.
- Travel and transportation
- Entertainment
- Supplies and materials
To break it down even further, let’s go over some examples of incidental expenses.
Examples of incidental expenses
There are many causes of incidental expenses, and some of the resulting costs are:
- Tips on goods or services: You may be able to budget for the list price of something, but any tips on the purchase would be considered incidental, as they can’t be planned for.
- Additional fees on travel: Incidental expenses often arise during travel, like the cost of parking, tolls on roadways, or baggage costs.
- Promotional supplies or materials: When going to a conference or event, it’s common to need promotional material printed, like brochures, flyers, or posters.
- Repairs or maintenance: Company property like a company car, laptop, or phone may be damaged or stolen while on the go, resulting in repair or replacement costs.
- Travel WiFi: Paying to access WiFi in a hotel, train, or plane.
- Gifts for clients: Treating clients or leads as an incentive in conducting business.
- Minor accessories: Items like chargers, battery packs, or cases for laptops or cell phones.
This is just a brief overview of possible incidental expenses. Depending on your business type, you may have additional incidental expenses beyond this list.
Are incidental expenses tax deductible?
Incidental expenses can be tax deductible so long as they meet the IRS standards.
For an expense to be tax deductible, it must be ordinary and necessary as part of business operations:
- Ordinary expenses are common and accepted as part of the industry.
- Necessary expenses are helpful and lead to revenue or value generation for the business.
Generally speaking, incidental expenses will meet these conditions and fall into an eligible, tax deductible expense category.
If you’re looking to claim a tax deductible expense, you must maintain record and documentation of what was purchased. This includes itemized receipts or invoices that prove what was purchased and its business purpose.
Incidental expenses vs. regular expenses
If an expense isn’t incidental, it’s considered a regular expense.
Regular expenses are predictable, routine, and expected costs incurred in day-to-day operations. These are often the fixed or variable expenses that show up consistently.
Examples of regular expenses are rent, salaries, wages, utilities, and costs of fulfillment.
Incidental expenses are small, irregular expenses that show up unpredictably in operations, but are still necessary.
Examples of incidental expenses are parking fees, minor repairs, and tips or gratuities on goods or services.
Challenges of incidental expenses
Incidental expenses are a sore point for financial teams because of the following challenges. However, with some careful planning and consideration, they can be avoided.
Planning and tracking
Incidental expenses are irregular and unexpected, thus difficult to plan for. And while they’re often small in amounts, they add up and eat into your profitability if unchecked.
To combat this, businesses often allocate a portion of their budget to a contingency fund. Contingency funds are used to cover any incidental expenses to ensure a business isn’t overspending on categories without planning.
Fraud and theft protection
It’s common for incidental expenses to go unchecked, flying under the radar because they’re small amounts. If a business isn’t careful, the laissez-faire attitude can be exploited for fraud and theft.
Maintain a standard of documentation, like receipts or invoices, to ensure nobody is claiming higher amounts or fake expenses that would go unchecked.
Understanding the tax implications
Most incidental expenses are tax deductible, so long as they meet the IRS requirements of being ordinary and necessary.
This includes tips and gratuities which would only be tax deductible if they pertain to an already tax deductible expense.
An added bonus of maintaining documentation for incidental expenses is having a listed purpose of the expense. For example, having a note on a receipt for parking that documents what the trip was for, thus affirming its eligibility of being tax deductible.
Collecting and maintaining documentation
If you’re going to be claiming incidental expenses on your tax return, you must maintain documentation that clarifies the nature of the expense.
In some cases, like leaving a cash gratuity for a hotel cleaning staff, there won’t be clear documentation. Maintaining a cash log may be sufficient, but when in doubt, it’s always best to consult with an accountant.
Note that the IRS does not require receipts for reimbursements on some expenses if the amount is less than $75. However, for your internal controls, it’s always best to request documentation when possible.
How to plan for and manage incidental expenses
Integrate these tactics in your financial planning, and you’ll successfully manage your incidental expenses.
Include a contingency fund in your budget
Think of a contingency fund as a “rainy day fund” that’s baked into your budget: you’re setting aside a portion of the monthly spend to cover any incidental expenses that arise.
If the contingency fund goes unused, then the business comes out on top, having lower expenses than what was planned for. But if the contingency fund is used, you’ll have planned to cover the unexpected.
Use corporate and virtual cards in your operations
For incidental expenses that aren’t cash-based, corporate cards and virtual cards create a clear paper trail, documenting who was responsible for the expense and when it occurred.
This is especially helpful for business travel as you’ll know exactly what trip a cost is associated with.
Not only does this help with tracking incidental expenses, it helps with job, project, or trip costing, giving you a complete count of every cost associated with a specific business occurrence.
Educate your team on the rules
Once your policy is drafted and structured, you should educate the team so they can make a snap judgment on what is acceptable and unacceptable. Use clear and predictable rules to ensure there’s no ambiguity and thus no chance of unapproved costs slipping through.
It’s also best practice to keep your policy in a centralized, accessible place so it’s available for review when needed.
Automate expense tracking and management
Take advantage of accounting software and expense management platforms to minimize the workload and maximize the effectiveness of your expense tracking. A combination of corporate cards and an integrated expense management platform streamlines expense approvals, documentation, and categorization.
The same system that you build to maximize efficiency through automation will also cut down on the risk of fraudulent transactions.
Streamlining expense management with automation
Incidental expenses don’t need to be a strain on your finance team. When you incorporate expense management automation, you’ll improve your ability to control and stay on top of every cost without lifting a finger.
With BILL Spend & Expense, you get access to the powerful duo of company cards (both physical and virtual) and expense management software to simplify approvals, streamline reporting, and stay within budgets.
No more unexpected costs or lengthy expense report workflows. You’ll win back both time and control over the business’s spending.
Try our interactive demo or request a live walkthrough to see the platform in action.
