What are incidental expenses?

Published Friday 15 May 2026

Table of contents

• What are incidental expenses?
• Types and examples of incidental expenses
• Incidental expenses vs. other business expenses
• Are incidental expenses tax deductible?
• How to manage incidental expenses
• Benefits of managing incidental expenses
• Simplify expense management with Xero
• FAQs on incidental expenses

Key takeaways

• Incidental expenses are the small, often overlooked costs that come with doing business. They include tips for hotel staff, parking fees, postage, and other minor charges that add up quickly if you don't track them.
• Most incidental expenses are tax deductible for businesses, but the rules differ for individuals. After the 2018 tax reform, most employees can no longer deduct unreimbursed incidental expenses on personal returns.
• Setting per diem rates and clear expense policies helps you stay in control. Using GSA per diem guidelines gives your team a spending framework and simplifies reimbursement.
• Tracking incidental expenses protects your cash flow and budget accuracy. Even small costs can distort your financial picture when they go unrecorded month after month.

What are incidental expenses?

Every business has costs that fall outside the big-ticket line items. Understanding what counts as an incidental expense helps you budget more accurately and claim the right tax deductions.

Incidental expenses are the minor, day-to-day costs that come up alongside your main business expenses. The IRS defines them specifically in Publication 463 as tips and fees paid to porters, baggage carriers, bellhops, hotel maids, and similar service staff during business travel.

You'll also hear them called "incidentals" or "incidental costs." The key characteristic is that they're small, somewhat unpredictable, and tied to a larger business activity. A hotel room is a travel expense; the tip you leave for housekeeping is the incidental.

While individually minor, these costs deserve attention. Left untracked, they create gaps in your financial records and make it harder to see where your money is actually going.

Types and examples of incidental expenses

Incidental expenses show up across nearly every part of your business. Knowing what to look for makes it easier to capture them when they happen. Here are the most common categories.

• Business travel: Tips for hotel housekeeping, bellhops, and valets; restaurant gratuities; taxi and rideshare tips; toll fees; airport parking; and baggage handling fees.
• Office and administrative: Printing and copying costs, postage and shipping for one-off mailings, small office supplies like pens or notepads, and replacement chargers or cables.
• Team and employee: Snacks and beverages for meetings, small employee appreciation gifts, birthday or celebration costs, and thank-you cards for clients.
• Technology and connectivity: Hotel Wi-Fi charges, international phone calls, mobile hotspot fees, and app subscriptions used briefly for a specific project.
• Damage and loss: Minor repair costs for company laptops or phones, replacement of damaged accessories, and cleaning fees for company property used during travel.

The common thread is that each cost is relatively small on its own. But when your team travels regularly or your office runs through supplies, these charges can add up to a meaningful line item each month.

Incidental expenses vs. other business expenses

Not every small cost is an incidental expense. Knowing where incidentals fit among your other expense categories helps you classify, budget, and report on them correctly.

Incidental expenses vs. operating expenses: Operating expenses are the predictable, recurring costs of running your business, like rent, utilities, and payroll. Incidentals are smaller and less predictable. You know you'll pay rent every month, but you can't always predict when someone will need to tip a hotel porter or buy emergency office supplies.

Incidental expenses vs. capital expenses: Capital expenses are large purchases that provide value over multiple years, such as equipment, vehicles, or property. Incidentals sit at the opposite end of the spectrum. They're consumed immediately and individually too small to capitalize on your balance sheet.

Incidental expenses vs. discretionary expenses: Discretionary expenses are optional spending choices, like team outings or upgraded software. While some incidentals are technically optional (you could skip the tip), they're usually expected as part of standard business conduct rather than a strategic spending decision.

The biggest practical difference comes down to budgeting. Operating and capital expenses are planned for in advance. Incidental expenses are better managed through policies and per diem allowances, since their exact amounts are hard to forecast.

Are incidental expenses tax deductible?

Tax treatment for incidental expenses depends on whether you're a business or an individual employee. The rules shifted significantly after the 2018 tax reform, so it's worth understanding the current landscape.

For businesses: You can generally deduct incidental expenses that you reimburse to employees, as long as you follow IRS guidelines. The federal per diem rate set by the General Services Administration (GSA) includes a specific incidentals-only component. If you reimburse up to that rate, the reimbursement is deductible for your business and tax-free for the employee.

For individuals: The Tax Cuts and Jobs Act of 2017 suspended the miscellaneous itemized deduction for unreimbursed employee expenses through 2025. That means most employees can no longer deduct incidental expenses on their personal tax returns, even if their employer doesn't reimburse them.

Exceptions exist. Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials can still deduct unreimbursed travel expenses, including incidentals. If you fall into one of these categories, keep detailed records and refer to IRS Publication 463 for guidance.

One more rule to keep in mind: business gifts are deductible only up to $25 per recipient per year. If your incidental expenses include small client gifts, track each one separately so you stay within the limit. Keeping receipts for all incidental spending, regardless of size, protects you during an audit and ensures you're claiming every deduction you're entitled to.

How to manage incidental expenses

Managing incidental expenses well comes down to having the right systems in place. A few straightforward practices can save you from budget surprises and make reimbursement painless for your team.

Set clear expense policies

Start by defining what your business considers an incidental expense and what spending limits apply. Your policy should spell out which costs are reimbursable, what documentation is needed, and how quickly employees should submit claims.

A clear policy removes guesswork. When your team knows the rules upfront, they're more likely to follow them, and you'll spend less time reviewing questionable charges. Share the policy during onboarding and keep it somewhere easy to find, like your company handbook or internal wiki.

Use per diem rates

Per diem rates give your employees a fixed daily allowance for travel-related expenses, including incidentals. The GSA publishes per diem rates that vary by location and break out separate amounts for lodging, meals, and incidentals.

For the current fiscal year, the incidentals-only rate is $5 per day for most domestic destinations. This covers tips and small fees associated with travel. Using per diem rates simplifies your accounting because you don't need to collect individual receipts for every small charge; the per diem amount serves as the reimbursable cap.

Track and categorize expenses

Capture incidental expenses as they happen rather than trying to recall them later. Mobile expense tracking software lets your team snap receipt photos, log costs on the go, and assign each charge to the right category.

Categorizing incidental expenses separately from your other costs gives you a clearer picture of where money goes. It also makes it simpler to track business expenses at tax time, when you need to identify deductible amounts quickly and generate an accurate expense report.

Review and adjust regularly

Look at your incidental expense data at least quarterly. Are certain categories growing faster than expected? Are per diem rates still realistic for the cities your team visits most?

Regular reviews help you spot patterns, like a specific department consistently exceeding its allowance or a travel destination where costs have risen. Use those insights to adjust policies, update per diem limits, or coach team members on smarter spending habits.

Benefits of managing incidental expenses

Putting structure around your incidental expenses pays off in several ways. Even small improvements in how you track these costs create a ripple effect across your finances.

• Improved cash flow visibility: When you record every incidental cost, you get a more accurate view of your actual spending. This helps you forecast cash flow needs and avoid shortfalls.
• More accurate budgets: Tracking incidentals over time reveals patterns that make future budgets more realistic. You'll stop underestimating the small costs that add up across your team.
• Better decision-making: Complete expense data helps you evaluate the true cost of activities like business travel or client entertainment. You can then decide where to invest more and where to cut back.
• Stronger fraud prevention: Clear policies and regular reviews make it harder for inflated or fictitious charges to slip through. Accountability increases when everyone knows expenses are being monitored.
• Greater operational efficiency: Standardized processes for logging and reimbursing incidentals save time for employees and finance teams alike. Less back-and-forth means faster approvals and fewer bottlenecks.

Simplify expense management with Xero

Incidental expenses may be small individually, but managing them well makes a real difference to your bottom line. With the right tools, you can capture every cost, stay on top of reimbursements, and keep your books accurate without adding hours to your week.

Xero's expense tracking features let your team submit claims from their phones, attach receipts in seconds, and route everything to the right account automatically. You get real-time visibility into spending across your business, so nothing slips through the cracks.

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FAQs on incidental expenses

Here are some frequently asked questions about incidental expenses.

What is the IRS per diem rate for incidental expenses?

The incidentals-only rate is currently $5 per day, covering tips for baggage handlers, bellhops, and hotel housekeepers. Check the GSA per diem lookup tool for location-specific meals and incidentals rates.

Do you need receipts for incidental expenses?

Not if your company uses per diem reimbursement. If you're reimbursing actual costs, keep receipts for tax documentation and internal records.

What are incidental expenses at a hotel?

Hotel incidentals include tips for housekeeping, bellhops, and concierge staff, plus small charges billed to your room like minibar purchases, parking fees, or laundry services.

What is the difference between incidental and miscellaneous expenses?

Incidental expenses are tied to a primary business activity, like tips during a work trip. Miscellaneous expenses are a broader category for costs that don't fit standard budget lines, such as bank fees or one-off software purchases.