Incidental expenses (IE), often referred to as “incidentals,” are minor costs that arise as a byproduct of undertaking business activities. These expenses can include tips, service fees, and other small outlays that are not directly related to the main business task but are necessary for its completion.
Definition
Incidental expenses refer to minor, ancillary costs incurred during the course of business activities. These expenses are usually necessary but not significant enough to warrant individual attention in financial statements.
Types of Incidental Expenses
Tips
Tips given to service personnel, such as waitstaff or hotel staff during a business trip, fall under incidental expenses.
Service Fees
Fees for services such as bellhop, housekeeping, and internet access at hotels.
Small Purchases
Minor purchases like stationery, snacks, or personal care items during business travel.
Reimbursements and Deductibility
Reimbursements
Incidental expenses may be reimbursed by an employer if they are:
- Reasonable and Necessary: The expense is essential for conducting business.
- Properly Documented: Receipts or other proof of purchase must be provided.
Tax Implications
Deductibility
Incidental expenses may be deductible on business tax returns if they are:
- Ordinary and Necessary: Align with IRS guidelines for business expenses.
- Properly Substantiated: Adequate records are kept to justify the expenses.
Per Diem Allowances
Some organizations offer a per diem allowance to cover incidental expenses, eliminating the need for detailed documentation. This is a fixed daily amount provided to employees.
Examples of Incidental Expenses
- Business Travel: Tips for hotel staff, transportation service fees, etc.
- Office Supplies: Unexpected small costs like paper or pens during client meetings.
- Client Entertainment: Minor expenses like parking fees or small gratuities.
Special Considerations
- Policy Adherence: Employees must follow their organization’s expense policies to ensure reimbursement.
- Receipts and Documentation: While some incidental expenses may not require receipts, it is good practice to maintain thorough records for tax compliance.
Historical Context
The concept of incidental expenses has evolved alongside the modern business environment, where small, necessary outlays are recognized as part of overall business expenditure, warranting structured reimbursement and tax treatments.
Applicability in Modern Business
Incidental expenses are critical in ensuring smooth business operations and are acknowledged in corporate policies, accounting practices, and tax regulations.
Comparisons and Related Terms
- Direct Expenses: Costs directly tied to business activities (e.g., salary, equipment).
- Indirect Expenses: Overhead costs necessary for business operations but not directly tied to specific activities (e.g., utilities, rent).
FAQs
Are incidental expenses always reimbursable?
How should incidental expenses be tracked?
Can incidental expenses be deducted on tax returns?
References
- IRS Publication 535: Business Expenses
- Employer Travel Expense Policies
- Accounting Standards for Expense Reimbursement
Summary
Incidental expenses, though minor, play a crucial role in business operations. Understanding their types, reimbursement processes, and tax implications ensures efficient financial management and compliance with regulations. This guide provides a comprehensive overview, making the handling of incidental expenses clear and manageable for businesses and employees alike.
