What are incidental expenses and how can your small business manage them?

Published Thursday 27 November 2025

Table of contents

• Definition of incidental expenses
• Types of incidental expenses
• Tax implications of incidental expenses
• How businesses handle incidental expenses
• Take control of your business expenses
• FAQs on incidental expenses

Key takeaways

• Establish clear expense policies that define which incidental costs your business will reimburse and require pre-approval for expenses over specific amounts to prevent budget overruns.

• Track all small expenses consistently using expense software or apps to identify spending patterns, prevent fraud, and maintain control over discretionary costs that can quickly drain cash flow.

• Budget monthly or quarterly amounts specifically for incidental expenses based on your past spending patterns, as these minor costs can accumulate significantly over time.

• Understand tax deductibility rules for different types of incidental expenses, such as the 50% limit on meals and entertainment costs, to maximize your legitimate business deductions while maintaining proper documentation.

Definition of incidental expenses

Incidental expenses are minor, unplanned costs that support your business operations. These expenses typically fall outside your main budget and aren't directly tied to your core business activities.

Key characteristics of incidental expenses include:

• Small amounts: Usually minor costs that seem insignificant individually
• Unplanned nature: Often arise unexpectedly during business operations
• Supporting role: Enable smooth business operations without being core activities
• Out-of-pocket: Frequently paid by employees and reimbursed later

Incidental expenses can differ depending on your business and industry. For example, buying stamps may be a small cost for most businesses, but a major expense for companies that send large volumes of mail.

Travel-heavy businesses typically see the highest incidental costs, with some industries having specific tax considerations; for example, food and beverage expenses for a long-haul truck driver during an eligible travel period are deductible at 80%, which is higher than the standard 50% for meals. Employees pay upfront with company cards or personal funds, then submit expense reports for reimbursement of these supporting costs.

Types of incidental expenses

Common incidental expenses fall into three main categories that most businesses encounter:

Business travel extras: Tips for hotel staff, taxi fares, toll fees, and parking charges that supplement main travel costs like flights and accommodation

Workplace celebrations: Employee birthday parties, customer gift wrapping, greeting cards, and flowers that enhance relationship building

Team operations: Meeting snacks, staff recognition awards, and small office supplies that support day-to-day management

Tax implications of incidental expenses

You can deduct many business expenses from your income in Canada, which lowers your tax bill. Tax rules for incidental expenses depend on the type of expense and your business situation.

The Canada Revenue Agency (CRA) lets you deduct expenses if they are reasonable and help you earn business income. For example, you can deduct up to six staff parties per year if all employees at a location are invited. Tips during business meals or travel are usually deductible as part of meal and entertainment expenses, but you can only claim 50% of these costs.

How businesses handle incidental expenses

Proper tracking prevents cost creep. While individual incidental expenses seem small, ignoring them creates budget leaks that damage your cash flow. Smart businesses treat these minor costs as seriously as major expenses.

Tracking your incidental expenses helps you:

• protect your cash flow by spotting spending patterns and cutting unnecessary costs
• prevent fraud by monitoring for unusual spending
• stay flexible by controlling discretionary spending during tight periods

Tips for managing your small business incidental expenses

Effective management starts with clear policies and consistent tracking.

• Set clear expense policies: Define exactly which costs your business will reimburse and require pre-approval for expenses over specific amounts
• Use per diem rates: Set daily allowances (like $75 for meals and tips) to control travel costs while giving employees spending flexibility within limits
• Budget regularly: Allocate monthly or quarterly amounts for incidentals to maintain financial control and prioritize essential expenses
• Track consistently: Monitor all small expenses and adjust policies as your business grows from startup to established company
• Train your team: Ensure employees understand expense policies, submission deadlines, and reimbursement processes to avoid delays and confusion
• Review and adapt: Update policies regularly and use expense patterns to inform pricing decisions when costs affect profitability
• Use expense software: Automate tracking and categorization to identify spending patterns and cost-cutting opportunities

Advantages of managing your business incidental expenses

You need to manage and track incidental costs because they can add up quickly.

By managing your incidental expenses, you can:

• reduce unnecessary costs and prevent financial leakage
• budget and forecast more accurately by tracking your expenses
• make better decisions with clear insights into your spending
• improve your cash flow by controlling incidental costs
• improved financial health by reducing unnecessary costs and preventing financial leakage
• accurate budgeting and forecasting by tracking and reviewing your expense patterns
• better decision-making by having insight into your spending patterns
• enhanced cash flow by controlling incidental expenses

Managing your incidental expenses can help you run your business more efficiently. For example, if mailing letters costs more than using a digital file-sharing program, you can switch to digital and save money.

When you improve your financial health and efficiency, you build confidence in your business. This can help you attract investors, partners and lenders.

Take control of your business expenses

Managing incidental expenses is easier with clear policies and the right tools. You can turn small costs into useful financial data, keep your cash flow healthy, budget accurately and make better decisions for your business.

Xero accounting software with expense management features makes tracking expenses simple. Your team can capture receipts on the go, automate approvals and see spending in real time. This saves you time and lets you focus on running your business. Try Xero for free and see how it can help you manage your expenses.

FAQs on incidental expenses

Here are answers to some common questions about incidental expenses.

Are incidental expenses tax deductible?

Many incidental expenses are tax deductible in Canada if they are reasonable and help you earn business income. For example, self-employed foot and bicycle couriers can claim a daily flat rate of $23 for extra food and beverages. Keep detailed records and receipts. Some items, such as meals and entertainment, have special rules, so check with a tax professional if you are unsure.

What's the difference between incidental and discretionary expenses?

Incidental expenses are minor, necessary costs that arise from a primary business activity, like a tip during a business trip. Discretionary expenses are non-essential, optional costs that a business can choose to cut back on, such as holiday parties or premium office furniture.

How much should I budget for incidental expenses?

There's no single answer, as it depends on your business type and activities. A good starting point is to review your past spending for a few months to find an average. You can then set a monthly or quarterly budget and adjust it as your business needs change.

Do I need receipts for all incidental expenses?

It's best practice to get a receipt for every business expense, no matter how small. The CRA requires proof for expense claims, and receipts are the best form of documentation. Using an expense tracking app can make it easy to snap a photo of a receipt and store it digitally, so nothing gets lost.