When an employee travels on business, it is common to incur incidental expenses. These are ancillary costs that go beyond the cost of transportation, meals, or lodging. If an employee takes a taxi to their hotel from the airport, they will have to pay for taxis and hotels. Tipping the taxi driver or hotel staff will also be charged. Incidental expenses such as haircuts or toiletries will likely be classified as personal as they are not paid for at home.
Understanding Incidental Expenses
The policies and procedures that govern incidental expenses are often outlined in an employee handbook. In the employee handbook, incidental expenses are defined and categorized as personal or business. They can also be limited in quantity, quality, or dollar amount. A per diem rate can be set, and the employee must pay all costs beyond it. In some cases, reimbursements may be required by company procedures. This could mean employees must pay incidental expenses out of pocket, with a company credit card, or petty money.
These procedures will make it easier to track incidental expenses for tax and accounting purposes. Employees should keep each purchase. These records should be compiled by employees and backed up with receipts to prove payment. Employees' expenses should be reimbursed with separate checks. This will make it clear that these payments are reimbursements and not income.
Tax Treatment of Incidentals
Tax treatment of incidental expenses paid by businesses or reimbursed by them depends on the taxpayer and type. Incidental expenses can be deducted if they are ordinary and necessary for business activities. They are also allowed if they have a reasonable amount and are local customary and expected.
Business Gifts
When a company presents gifts to customers, it is common to incur incidental expenses. In addition to the gift itself, companies that give such gifts may have to cover the delivery, wrapping paper, ribbons, and bows.
Deductibility of Business Gifts
In addition to business gifts, incidental expenses such as gift-wrapping and engraving, packaging, shipping, insurance, or any other related costs that do not add substantial value are not included in the calculation of the maximum deduction for business gifts. This is good, as business gift deductions are limited to $25 per recipient in each tax year. You can't deduct any expense exceeding $25 for gift recipients.
Casualty or Theft
In addition to the damage or theft of property, companies often incur incidental expenses when they suffer a business loss or theft. The company that owns a factory will be responsible for its repair or replacement. It could also cover incidental costs such as medical treatment for personal injuries, moving and storage expenses, and rent for temporary space.
National Guard and Reserve Travel
National Guard and Reserve members can claim an above-the-line deduction from their gross income for meals, lodging, and incidental travel more than 100 miles and an overnight stay to attend Guard or Reserve meetings.
Tax Return Forms for Incidentals
National Guard and Reserve members deduct 100-mile travel expenses from their gross income on Line 24 of Form1040. Self-employed individuals can deduct travel expenses related to jobs on Schedule C of Form 1040A, 1040A, or 1040EZ. Depending on the entity type, businesses may deduct travel expenses from business expenses on Form 1120, the 1120S, or Form 1065.
Guidelines of Incidental Expenses
The employee handbook usually contains the rules and procedures to manage incidental costs. They identify and classify incidentals as personal or business. It should also establish limits on quality, cost, or quantity. A per diem rate could also be established. Any amount spent beyond the limit becomes the employee's responsibility. You should also note that meal costs are not included in the compensation plan. Alcohol is excluded. Employees may be required to pay for incidentals by the company under their compensation procedures.
- Payments out of pocket
- Credit cards for companies
- Petty cash
These procedures can be used to deal with accounting and tax issues. Employees must maintain detailed records of all purchases. These records should be compiled in expense reports. They should also provide receipts for payment before they are submitted to the company. It is essential for you, as an employee, to have a solid understanding of how incidental charges are handled in the field in which you work. In addition, to guarantee accurate reporting, you need to know how to handle your financial obligations effectively.
