Incidental expenses (IE) are a crucial aspect of business travel and operational costs that every employee and employer should understand. These minor costs, often overshadowed by larger expenses like hotel fees or airfare, can add up quickly and impact both corporate budgets and personal tax returns.
What Are Incidental Expenses?
Incidental expenses refer to the minor costs incurred beyond major business expenses, such as accommodation and travel tickets. They typically include gratuities, small purchases, and other slight expenditures that occur during business operations, particularly during travel. As an example, when traveling for business, an employee might incur incidental costs such as:
- Tips for taxi drivers and hotel staff
- Fees for checked luggage or handling
- Snacks or beverages purchased en route
- Charges for Wi-Fi access in hotels or airports
While some incidental expenses may be considered necessary for business operations, others—such as personal grooming or toiletries—are often categorized as personal expenses since they are typically required regardless of travel.
Key Points to Remember
- Nature of Incidental Expenses: These are small, often overlooked costs that are ancillary to major expenses.
- Common in Business Travel: They are frequently encountered when employees travel for work, whether for meetings, conferences, or other events.
- Reimbursement Policies: Coverage of incidental expenses varies by company policy; some employers may reimburse while others may not.
Company Policies on Incidental Expenses
Many enterprises include rules around incidental expenses in their employee handbooks. Policies often vary and may specify:
- Types of Expenses Covered: What counts as an incidental expense and what does not.
- Limits on Reimbursement: Per diem rates, which establish caps on how much can be claimed for daily incidental expenditures.
- Payment Procedures: How employees should pay for these costs—out of pocket, through company credit cards, or petty cash.
Per Diem Rates
The General Services Administration (GSA) sets per diem rates for business travel within the Continental U.S, while different entities set rates for non-continental locations and international travel. These rates guide what a business can reimburse for accommodations, meals, and incidentals each day.
Tax Implications of Incidental Expenses
Navigating the tax treatment of incidental expenses can be complex. Here are some important aspects to consider:
For Businesses:
- Reimbursement Deductions: Businesses can deduct the costs of reimbursed expenses up to the established per diem limits.
- Tracking for Accounting: Companies must maintain accurate records of all expenses to validate deductions come tax time.
For Employees:
- Deductions After Tax Reforms: Most taxpayers can no longer deduct incidental expenses, including unreimbursed employee expenses, due to changes implemented in the 2018 tax reforms. Some special categories of taxpayers, such as Armed Forces reservists, can still utilize deductions through Form 2106.
- Reportable Expenses: Individuals can deduct certain business-related expenses, with meal costs typically limited to 50% of the total.
Types of Incidental Expenses
Here’s a deeper look into various types of incidental expenses across different scenarios:
Travel Expenses
When employees travel for business, incidental expenses commonly include transportation costs (such as taxis), meals, and miscellaneous tips and fees.
Business Gifts
When a business gives gifts, costs such as wrapping and shipping can accrue. These incidentals are not counted against the $25 deduction cap placed on gifts given to clients or customers.
Property Damages
In instances of loss or damage to business property, companies might incur incidental expenses related to repair, medical care, and temporary relocation costs not considered part of loss deductions.
Conclusion
Incidental expenses, while minor, can have notable implications for both businesses and employees. Understanding the nature of these costs, the clarity of reimbursement policies, and the tax implications is vital. For employees, ensuring compliance with company policy regarding incidental expenses is essential, as is accurate record-keeping to maximize potential reimbursements. For businesses, proper tracking and understanding of these expenses can aid in accurately managing budgets and taxes.
By fostering a clear understanding of incidental expenses, both employees and employers can navigate the complexities of business expenses more effectively.