What Does Meals and Incidentals Mean for Business Travel Expenses?

Business travel expenses add up quickly, and companies reimburse employees for costs incurred on the road. Among these, meals and incidentals are a common category, but their specific treatment can be unclear.

Understanding how these expenses are categorized and reimbursed is essential for compliance with company policies and tax regulations.

Differences Between Meals and Incidentals

Business travel expenses typically fall into two categories: meals and incidentals. While both contribute to overall costs, they are reimbursed differently and have distinct tax implications.

Meal Costs

Meal expenses cover food and beverages purchased while traveling for work, whether at restaurants, cafes, or through hotel room service. The IRS states that meals must be “ordinary and necessary” for business purposes to qualify for deductions. Employees should retain receipts, as many companies require documentation for reimbursement.

Businesses often set spending limits on meals, such as per-meal caps or restrictions on purchases outside business hours. Meals with clients, categorized as entertainment expenses, are subject to different tax rules than meals purchased for personal sustenance while traveling.

Tips

Gratuities for restaurant servers, hotel staff, and transportation providers are considered incidental expenses rather than part of meal costs. While tips for meals are often reimbursed as part of dining expenses, other gratuities—such as those for hotel housekeeping or baggage handling—fall under incidentals. The IRS allows reasonable tipping based on customary practices, but excessive amounts may not be reimbursable. Some companies set percentage limits or daily caps on gratuities. Employees should document tips if required by company policy, especially when listed separately from the base service cost in expense reports.

Small-Value Necessities

Incidentals also include minor expenses that do not fall under lodging, transportation, or meals. These can range from luggage storage fees to small office supplies needed for business activities. Purchasing a phone charger after forgetting one at home, for example, would typically be considered an incidental expense.

The General Services Administration (GSA) defines incidentals as “fees and tips given to porters, baggage carriers, and hotel staff,” but companies may expand this definition based on internal policies. While these costs are small, they can accumulate over a trip, making it important to track them. Some businesses simplify reporting by including incidentals in a lump-sum allowance instead of requiring individual receipts.

Per Diem vs. Actual Expense Methods

Employers use different approaches to reimburse travel expenses, with per diem and actual expense methods being the most common.

The per diem method provides a fixed daily allowance for meals and incidentals. The GSA sets these rates for federal employees, but private companies often adopt them as well. Rates vary by location to reflect cost-of-living differences. Since per diem payments do not require receipts for each expense, they simplify reimbursement and reduce paperwork. However, any amount exceeding IRS-approved per diem rates is considered taxable income.

The actual expense method requires employees to track and document every business-related cost incurred during a trip. This ensures precise reimbursement but demands detailed record-keeping. Employees must submit receipts for all eligible expenses, and employers review each claim for approval. While this method reimburses the exact amount spent, it increases the risk of errors or disputes over allowable costs. Companies often set spending limits or require pre-approval for certain expenses to control costs.

Expense Tracking for Accurate Records

Proper documentation of business travel expenses ensures compliance with company policies, facilitates reimbursements, and supports financial reporting. Without a structured approach, employees may forget expenditures, leading to discrepancies or denied claims.

Many companies use digital expense management systems that allow travelers to record transactions in real time. These platforms often integrate with corporate credit cards, automatically categorizing expenses and reducing the risk of lost receipts.

Accurate record-keeping is also essential for financial audits and internal controls. The IRS requires supporting documentation for business-related expenses, and failing to provide adequate records can result in disallowed deductions or penalties. Companies often implement internal review processes where finance teams verify submitted expenses to detect errors, duplicate claims, or unauthorized purchases. Clear guidelines on reimbursable expenses help minimize disputes and ensure consistency across departments.

Tax Treatment and Reporting

Business travel expenses must comply with tax regulations to qualify for deductions. The IRS allows businesses to deduct travel expenses, including meals and incidentals, if they meet the “ordinary and necessary” criteria under the Internal Revenue Code. Expenses must be directly related to the business purpose of the trip, and excessive or personal costs may be disallowed.

Employers must distinguish between reimbursements under an accountable plan and those under a non-accountable plan. Accountable plans require employees to substantiate expenses with receipts and return any excess reimbursements within a reasonable timeframe, typically 120 days per IRS guidelines. Under this structure, reimbursements are not included in taxable wages and do not appear on an employee’s W-2.

Non-accountable plans, however, do not require detailed substantiation, meaning all payments to employees are subject to income tax withholding and payroll taxes. Employers must properly classify these payments on tax filings to avoid penalties, as misclassifying reimbursements can lead to IRS scrutiny and fines.