What are incidental expenses? Types, tax, and tips

Published Friday 20 March 2026

Table of contents

• What are incidental expenses?
• Types of incidental expenses
• Are incidental expenses tax deductible?
• How to manage incidental expenses
• Simplify expense tracking with Xero
• FAQs on incidental expenses

Key takeaways

• Track all incidental expenses with receipts for amounts over $75 and maintain a written log for smaller costs, documenting the business purpose to ensure proper tax deduction eligibility.
• Establish clear reimbursement guidelines and set per diem allowances for employees to control travel-related incidental costs while preventing unexpected budget overruns.
• Allocate 1-5% of your operating budget for incidental expenses and review spending patterns regularly to identify opportunities for cost reduction or process improvements.
• Recognize that incidental expenses are generally tax deductible when they're ordinary and necessary for business operations, but consult a tax professional to confirm eligibility for your specific situation.

What are incidental expenses?

Incidental expenses are small, unplanned costs that arise during normal business operations. For business travel, the IRS defines these as fees and tips given to porters, baggage carriers, and hotel staff.

Also called incidentals or miscellaneous expenses, these out-of-pocket costs aren't directly tied to your main business activity and often fall outside your regular budget.

What counts as "incidental" varies by business. Postage might be a quarterly expense for one company and a daily cost for another.

Businesses with traveling employees often have higher incidental costs. Employees typically pay these expenses out of pocket or with a company card, then submit expense reports for reimbursement.

Types of incidental expenses

Common types of incidental expenses include:

• Business travel: tips for hotel and restaurant staff, taxi fares, and toll fees. When using a personal vehicle, the standard mileage rate for business use in 2024 is 67 cents per mile.
• Gifts and celebrations: employee birthday celebrations, client gifts, wrapping paper, cards, and flowers
• Team management: staff recognition awards, meeting snacks, and small morale-boosting purchases
• Office supplies: minor items like stamps, pens, notepads, and printer ink purchased outside regular orders
• Client entertainment: coffee meetings, small client meals, and parking when meeting prospects

Are incidental expenses tax deductible?

Yes, incidental expenses are generally tax deductible if they're ordinary and necessary for your business. The IRS allows you to deduct business-related incidentals as long as you can document them properly.

To claim incidental expenses on your taxes:

1. Keep records: Save receipts for expenses over $75, and maintain a log of smaller costs
2. Document the business purpose: Note why each expense was necessary for your work
3. Separate personal from business: Only deduct expenses with a clear business connection
4. Track travel incidentals: The IRS allows an optional method for deducting travel incidentals, which is $5 per day for any locality, to cover tips and small fees

For travel expenses, you can either deduct actual costs or use the regular federal per diem rates set by the General Services Administration (GSA), which cover lodging, meals, and incidental expenses.

Consult a tax professional to confirm which incidental expenses qualify for your specific business situation.

How to manage incidental expenses

Managing incidental expenses helps you control costs that can quietly add up over time. Because these expenses are small and irregular, they're easy to overlook. Tracking them gives you visibility into where your money goes, helps prevent fraud, and improves your cash flow.

Incidental expenses differ from discretionary expenses, though the two are related. Discretionary costs are optional and can be adjusted based on available funds. Incidentals, while often small, are typically necessary for day-to-day operations.

Here are practical tips for managing incidental expenses.

Tips for managing your small business incidental expenses

• Establish clear guidelines: Define which expenses your business will reimburse and communicate these rules to all employees
• Set per diem allowances: Create a daily rate (for example, $75) to cover meals, tips, and miscellaneous travel costs, with employees covering any excess unless they can justify the expense
• Create an incidentals budget: Plan monthly or quarterly limits to keep spending predictable and focused on priorities
• Track all expenses: Monitor incidental costs regularly and adjust policies as your business grows
• Train your team: Ensure employees understand reporting requirements, receipt deadlines, and the reimbursement process
• Review policies periodically: Update guidelines to match your current business needs and use spending patterns to inform pricing decisions
• Use expense-tracking software: Record, categorize, and analyze expenses to identify patterns and find opportunities to cut costs

Tracking incidental expenses provides several advantages for your business.

Benefits of managing incidental expenses

Managing incidental expenses delivers measurable benefits:

• Stronger financial health: Reduce unnecessary costs and prevent small expenses from accumulating unnoticed
• More accurate budgets: Use expense patterns to create realistic forecasts
• Better decisions: Gain insight into spending habits to identify where to cut or invest
• Improved cash flow: Keep more money available by controlling irregular costs
• Greater operational efficiency: Spot opportunities to switch to more cost-effective solutions, like replacing postal mail with digital file sharing

Strong expense management also builds confidence with investors, partners, and lenders who want to see disciplined financial practices.

Simplify expense tracking with Xero

Tracking incidental expenses doesn't have to be complicated. Xero's expense management tools help you capture costs, categorize spending, and see exactly where your money goes. Get one month free and take control of your business expenses.

FAQs on incidental expenses

Here are answers to common questions about incidental expenses.

How much should I budget for incidental expenses?

Most small businesses allocate 1–5% of their operating budget for incidentals, though the right amount depends on your industry and how often employees travel or entertain clients.

What's the difference between incidental and miscellaneous expenses?

The terms are often used interchangeably. Both refer to small, irregular costs that don't fit neatly into standard expense categories like rent, payroll, or inventory.

Do I need receipts for all incidental expenses?

The IRS requires receipts for expenses over $75. For smaller amounts, keep a written log noting the date, amount, and business purpose of each expense.

When should an incidental expense be reclassified as a regular operating expense?

If an incidental expense occurs predictably each month or represents a significant portion of your budget, consider adding it as a line item in your regular operating expenses for better tracking and forecasting.