What are incidental expenses? Examples and tips for managing them

In this article, we'll clarify what qualifies as an incidental expense, the tax implications of these costs, and how to manage them properly. We'll also outline best practices for tracking and budgeting for incidentals to set your business up for success.

Examples of incidental expenses

Incidental expenses can show up in many different contexts. Although circumstances vary, here are some common examples that might come up during business travel:

• Tips for hotel staff: You’ll often encounter incidental costs during business travel. While your lodging might be a planned expense built into your budget, the money you give hotel porters and housekeepers as a tip would be incidental.
• Restaurant gratuities: Similarly, your restaurant meals might be part of the business trip budget, but the tips you leave for servers are incidental expenses.
• Transportation extras: Parking fees, tolls, and driver tips are considered incidental expenses even though your rental car or driver reservation is typically budgeted.
• Wi-Fi costs: Your hotel may charge for the use of high-speed internet, which would be another incidental cost.
• Costs of theft or damage: If you damage or lose company property during business travel, the cost to repair or temporarily replace it would be an incidental expense.
• Printing and photocopying: Sometimes you need to pay to print, photocopy, or make large posters for a presentation during a trip. These costs might also qualify as incidental expenses.

Other incidental expenses might include fees to repair office equipment, last-minute decor for a company event, or unforeseen fines. Taxes aren't typically considered incidentals because they're a budgeted and planned expense in your business finances.

Are incidental expenses tax-deductible?

Incidental expenses can be tax-deductible, but the specifics depend on factors like your local tax laws and the types of costs involved. In general, here are some guidelines to keep in mind when assessing the tax implications of incidentals:

• Your company can usually deduct incidental expenses that are directly related to normal business operations. This includes tips to hotel staff, office supplies, printing, etc. incurred during business travel.
• Keeping accurate, descriptive, and up-to-date records of such incidental expenses is essential to provide support for these deductions and protect your company in the event of an audit. Always collect relevant documents like receipts and bills with details about the location, time, and the goods or services involved.
• There's a federal per diem rate that covers incidentals. The amount varies depending on where and when the business is being conducted, but it’s usually around a couple hundred dollars.

Challenges with incidental expense management

1. Difficulty in planning and tracking

By their nature, incidentals are unpredictable and unplanned. It’s difficult for finance teams to budget for these expenses since costs can vary based on the nature of the trip or activity, or where the trip or activity is taking place.

Additionally, some incidental costs may come without receipts. For example, employees don’t get receipts for the cash tips they give to hotel staff like housekeeping or valets, which makes some incidental expenses particularly hard to track. Employees may end up paying for them out of pocket.

2. Risk of expense fraud

The lack of receipts for some incidentals makes it easier for employees to submit fraudulent expense reports. With no paper trail, employees may feel more comfortable claiming a higher amount for reimbursement and keeping the difference for themselves.

3. Inaccurate or missing data

The two challenges above can make it hard for businesses to accurately forecast or report on incidental expenses. Without receipts, employees must manually report incidentals, which can lead to simple human error. They may even forget to add some incidentals to their T&E reports.

While these costs are generally small, they can add up over time and amount to significant company spend. This can skew financial analyses and forecasting, creating an unclear picture of your business’s financial health.

Tips for managing incidental expenses

Properly managing incidental expenses is important to give you an accurate picture of your financial situation. You can manage your incidentals by taking the following steps:

Establish a process

Set up specific procedures for incidental expenses. These might include a process for managers to approve incidental spending claims and authorize expense reimbursement. Establish requirements like receipts or other documentation and multiple channels of approval in certain instances.

Communicate expectations

Establish company rules that dictate what counts as an incidental expense and what to do about these costs. Communicate to employees the process for tracking incidentals, which documents to submit, and how to get reimbursements.

Establish a budget

Create a budget that accounts for incidentals by reviewing your company's historical financial records. Review the data to determine past incidental expenses and any recurring patterns. This will help you establish the usual incidental sources and how much money goes toward them. Try to separate incidentals into expense categories to allocate the correct portions of your budget to these areas.

Set travel guidelines

Setting clear travel and expense (T&E) guidelines can help control incidental expenses. For example, you could implement a per diem allowance to cover any incidental costs employees might incur during business travel. If the employee spends more than the established per diem, they either pay out of pocket or have to submit a valid business case for the expense. As an alternative, some corporate cards let you set spend limits at the card or policy level.

Create an emergency fund

Incidental expenses tend to be small, but they can add up, especially if they aren't anticipated. Occasionally, there might be higher-cost incidentals as well. Creating an emergency fund with designated money for incidentals can provide some reassurance in the event of unexpected costs.

Keep the system and budget up to date

Monitor your expenses closely. Adjust your budget and how much you set aside for incidental expenses based on past spending and future projections. Update company policies around incidentals to maximize savings and efficiency as needed. Nothing in business financing is set in stone, and you'll likely find room for improvement in certain areas.

Automate your expense tracking

Keeping track of any company expenses, including incidental expenses, can be a huge hassle for you and your employees. Consider implementing software or other accounting systems that allow you to automate the tedious and time-consuming parts of expense tracking.

Streamline incidental expense tracking with Ramp

Tracking financial transactions like incidental expenses requires time and effort, but the right technology can automate many of the most tedious aspects. Ramp's expense management platform helps you streamline your process for tracking incidentals, curbing unnecessary spending and effectively budgeting for these costs.

Our corporate cards have tools for setting spending limits, reporting expenses, and categorizing charges, which gives you accurate data about incidental expenses to establish your budget. Ramp also automates the expense receipt and reimbursement process, freeing up countless hours for your finance team.

See how Ramp can automate your expense tracking and help you budget for travel expenses more effectively.