Incidental Expenses (IE)

Incidental Expenses (IE): Definition and Key Points

Incidental expenses are minor costs incurred while conducting business, typically ancillary to larger expenses like transportation, meals, or lodging. Common examples include tips to hotel staff or taxi drivers, fees for mailing a business gift, baggage fees, and small supplies purchased during travel.

Key takeaways:
* Incidentals are usually small, routine costs that support business activities.
* Reimbursement is determined by employer policy; if reimbursed and properly documented, businesses can generally deduct them.
* Most individual taxpayers cannot deduct incidental or other miscellaneous employee expenses after 2018, with limited exceptions.
* Per diem rules and IRS guidance affect how incidentals are treated for tax and reimbursement purposes.

Employer Policies and Reimbursement

Companies typically define incidental expense rules in their employee handbook. Policies commonly address:
* Which expenses qualify as business versus personal.
* Limits on amounts, quality, or quantity.
* Use of per diem rates instead of itemized reimbursement.
* Approved payment methods (employee out-of-pocket, company card, petty cash, or imprest account).
* Required documentation and submission procedures (receipts and expense reports).

Best practices:
* Employees should keep detailed receipts and attach them to an expense report.
* Reimbursements should be issued separately (e.g., a stand-alone check) to avoid being treated as taxable income.

Per diem rates:
* The General Services Administration (GSA) sets per diem rates for the continental U.S.
* The Department of Defense sets rates for non-foreign U.S. areas (Alaska, Hawaii, Puerto Rico, Guam).
* The State Department sets foreign per diem rates.
* Employers may cap deductible reimbursements at these per diem amounts.

Tax Treatment

The tax treatment differs for businesses and individuals.

How businesses deduct incidentals:
* Employers that reimburse employees for travel-related incidentals can generally deduct those costs, subject to per diem limits and ordinary-and-necessary tests.
* A total daily allowance used for lodging, meals, and incidentals cannot exceed applicable federal per diem rates (vary by location).

How individuals deduct incidentals:
* Most miscellaneous employee deductions, including unreimbursed incidental expenses, were eliminated by the 2018 tax changes.
* A few individuals (e.g., Armed Forces reservists, certain performing artists, some state/local officials) can still claim such expenses using Form 2106.
* Self-employed taxpayers and sole proprietors may deduct ordinary and necessary business expenses (including some travel and incidental costs) on Schedule C, subject to the usual rules (for example, meals are generally 50% deductible).

Special notes:
* Under certain per diem rules, a nominal incidental-only allowance (historically illustrated as up to $5) may apply when meals are not separately deducted; applicable rules vary.
* Incidental costs that are ancillary to business gifts (wrapping, postage, etc.) are generally excluded from the dollar limit used to compute the gift deduction. However, the deduction for business gifts is limited to $25 per recipient per year; costs over that limit are not deductible.
* Incidental costs resulting from casualty or theft (medical treatment, temporary housing, moving or storage costs) are generally not deductible as casualty losses.

National Guard and Reserve:
* Members of the National Guard and Reserve may claim an above-the-line deduction for travel (meals, lodging, and incidentals) when traveling more than 100 miles and staying overnight to attend meetings; Form 2106 may apply.

Recordkeeping and Forms

Maintain clear records to support business deductions and employer reimbursements:
* Keep itemized receipts and a summarized expense report.
* Employers should document reimbursement policies and per diem limits.

Relevant IRS resources and forms:
* Publication 535 — Business Expenses
* Publication 463 — Travel, Gift, and Car Expenses
* Form 2106 — Employee Business Expenses (limited use)
* Schedule C (Form 1040) — Profit or Loss From Business (for sole proprietors)

Incidental Costs in Construction

In construction, incidentals can include expenditures tied to site purchase and preparation (site improvement, grading), original furnishings or equipment, design and legal fees, insurance during construction, and general administrative costs. Treatment of these costs depends on whether they are capitalized or expensed under construction and tax accounting rules.

Practical Advice

• Check your employer’s travel and reimbursement policy before a trip.
• Use the company credit card if required, or save all receipts if paying out of pocket.
• Submit receipts promptly and follow the company’s expense reporting procedures.
• If self-employed, track ordinary and necessary incidental costs carefully and report them on Schedule C, observing limits (such as the 50% rule on meals).

Bottom Line

Incidental expenses are small but common costs of doing business. Employers generally control reimbursement policy and can deduct reimbursed incidentals within per diem limits. Most individual employees lost the ability to deduct unreimbursed incidental expenses after 2018, though limited exceptions remain and self-employed taxpayers can still deduct ordinary and necessary business costs when appropriate. Proper documentation and adherence to company and IRS rules are essential.