Incidental Expenses | Meaning, Types and Limitations

What are Incidental Expenses?

Incidental expenses can be defined as the minor costs and non-budgetary expenses that occur while conducting any business. Incidental expenses provide the necessary support to the business in the form of secondary expenses. Incidental expenses are generally not backed up by proof, so it is difficult to track and record them. They are unplanned and unpredictable. These expenses are not directly related to the business but support the primary activities of the business.

Some of the common incidental expenses include:

• Office Supplies and Equipment
• Training and Development
• Marketing and Advertisement Costs
• Professional Service Fees
• Business Travel Expenses

Types of Incidental Expenses

1. Travel-related Expenses: These are such expenses that arise when an employee needs to go on a business trip. Incidental expenses, in this case, will include all the minor expenses that will arise during the tip like tips to the hotel staff, food expenses, etc.

2. Customer Entertainment-related Expenses: Incidental expenses, in this case, will include the expenses related to the business which the company bears. For example, Discount coupons to customers, stickers, flowers, cards, etc.

3. Employee-encouragement Expenses: Employee-encouragement costs include the cost that the management bears to motivate its employees. For example, Laundry services, food during business meetings, expenses for employee birthdays, etc.

4. Cost of Theft or Damage: Compensatory costs that need to be incurred by the business that is caused due to any kind of theft, fire or damage in the premises.

Limitations of Incidental Expenses

1. Difficulty in Tracking: Incidental Expenses are minor, they become difficult to track. Also, some minor expenses do not include bills so they are mostly forgotten, like tips paid to hotel staff during any business trip. Especially for big organisations, it becomes very difficult to track the incidental expenses as they are so small. It becomes difficult to tally the records when some transactions are omitted and some transactions have been recorded twice.

2. Employee expense Fraud: As some of the incidental expenses do not carry bills, employees can fake claim the incidental expenses, resulting in higher unnecessary costs. Similarly, Employees can present the bill even twice.

3. Unplanned Expense: Incidental expenses are unpredictable and arise according to spontaneous plans. Also, there are no reserves set aside to compensate for the incidental expenses.

4. No useful in the decision-making process: Incidental Expenses are useless from the viewpoint of the decision-making committee. Their evaluation is not required to make any decision for the business.

How Incidental Expenses are Reimbursed?

Company policy decides the procedure of reimbursement for incidental expenses. Generally, employers reimburse the incidental expenses in two ways, either they will provide the company credit card to the employee or will ask the employee to pay out of his/her pocket and the company will pay him/her later. Some employers set per diem rates to compensate for incidental expenses. A per diem rate is a daily allowance that the company needs to provide to its employee to meet incidental expenses like meal expenses, rentals, etc.

Tax and Deductions for Incidental Expenses

For Businesses: Some incidental expenses like business travel expenses, advertising costs, etc., may qualify for some deductions and reduce taxable income for businesses, but up to some extent. The expenses qualified for deductions must be ‘incidental.’

For Individuals: Some work-related, business-related, and professional development incidental expenses that the employee bears may be eligible for some deductions. Generally, 50% of the meal costs are deductible, using either a standard deduction or itemising actual costs.