Discretionary Expenses: Definition, Examples, Controls
Learn what discretionary expenses are, see common business examples, and find out how finance teams can classify, track, and control spending.
Discretionary expenses are business costs you can reduce, delay, or eliminate without disrupting essential operations. They include optional travel, client entertainment, employee perks, and software upgrades. Knowing which expenses are discretionary helps finance teams set budgets, enforce spending policies, and identify costs to reduce without cutting activities that support the business.
What are discretionary expenses?
Discretionary expenses are costs a business chooses to incur rather than costs required by contracts, regulations, or essential operations. Also called discretionary costs or discretionary spending, they have four common characteristics:
- Management controls whether and how much to spend.
- Spending can usually be reduced, postponed, or cancelled.
- Costs are often governed by department budgets and expense policies.
- The business can continue operating without the expense.
Discretionary does not necessarily mean wasteful. For example, attending a sales conference may be optional but still generate valuable business opportunities.
Examples of discretionary business expenses
Common discretionary business expenses include:
- Travel and lodging: Optional conferences, airfare, hotels, and rental cars.
- Meals and entertainment: Client dinners, team lunches, and event tickets.
- Marketing and sponsorships: Paid campaigns, trade shows, and promotional merchandise.
- Employee events and recognition: Holiday parties, offsites, and non-contractual awards.
- Training and development: Optional courses, certifications, and workshops.
- Software upgrades: Premium subscriptions, additional seats, and optional features.
- Gifts and memberships: Client gifts, professional associations, and networking memberships.
- Office improvements: Furniture upgrades, décor, and non-essential renovations.
An expense's purpose determines whether it's discretionary. For example, travel to fulfill a customer service obligation is operational, while travel to an optional networking event is discretionary.
Discretionary vs. non-discretionary expenses
Discretionary expenses are generally optional and adjustable, while non-discretionary expenses are required to meet contractual, legal, or operational obligations.
| Factor | Discretionary expenses | Non-discretionary expenses |
|---|---|---|
| Who controls spending | Management, through budgets and policies | Contracts, regulations, and operating requirements |
| Examples | Travel, client meals, sponsorships, and perks | Rent, base payroll, insurance, and loan payments |
| Flexibility | Can often be reduced, delayed, or eliminated | Difficult to change without affecting obligations |
| Spending controls | Budgets, approvals, and expense policies | Contract management and renewal reviews |
| Impact of cuts | May affect growth, morale, or client engagement | May disrupt operations or breach obligations |
Discretionary vs. fixed expenses
Fixed expenses stay relatively constant over a period, while discretionary expenses depend on management decisions. A cost can be both. For example, an annual software subscription has a fixed price during its contract term but may be discretionary when the business decides whether to renew it.
How are discretionary expenses taxed in the US and Canada?
Discretionary business expenses may be tax-deductible, but the rules vary by expense type and jurisdiction. In the US, qualifying business meals are generally 50% deductible, while most entertainment expenses are not. In Canada, qualifying meals and entertainment are generally subject to a 50% deduction limit.
| Expense | United States (IRS) | Canada (CRA) |
|---|---|---|
| Client meals | Generally 50% deductible | Generally 50% deductible |
| Entertainment, including event tickets | Generally not deductible | Generally 50% deductible |
| Business gifts | Generally limited to $25 per recipient per year | Treatment depends on the gift |
| Qualifying employee social events | Exceptions may apply | Exceptions may apply to up to six events per year |
Sources: IRS Publication 463 and Canada Revenue Agency business expense guidance.
Finance teams should separate expenses with different tax treatments when coding transactions. For example, a client dinner and sporting event tickets may require different GL accounts even when purchased during the same business trip. Confirm the applicable deductions and exceptions with your tax advisor.
How to identify discretionary expenses
To identify discretionary expenses, review whether a cost can be paused, reduced, or replaced without affecting essential operations or breaching an obligation. Ask these four questions:
1. Could we pause the expense for 90 days?
If postponing the expense would stop essential work, delay contractual commitments, or create penalties, it is likely non-discretionary. If operations can continue without it, the expense may be discretionary.
2. Is the expense required by law or contract?
Payroll taxes, lease payments, required insurance, and mandatory safety training are generally non-discretionary. Optional purchases may also become contractual obligations once an agreement is signed.
3. Does spending depend on business activity or management decisions?
Costs such as raw materials and shipping often change with business volume. Conference attendance, team events, and software upgrades are more directly influenced by management decisions.
4. Could a lower-cost option meet the same need?
An expense may contain both essential and discretionary components. For example, accounting software may be necessary, while a premium subscription tier with unused features may be optional.
Classify each expense category as discretionary, non-discretionary, or mixed, and document the reason for future budget reviews.
How to control discretionary expenses
Controlling discretionary expenses starts with clear budgets, spending policies, approval rules, and regular reviews. These six steps help finance teams manage optional spending without eliminating valuable business activities.
1. Assign budgets and category owners
Set budgets for categories such as travel, entertainment, and software. Assign a department owner to approve spending and review actual expenses against the budget.
2. Set spending limits in your expense policy
Define transaction limits, daily category limits, and documentation requirements. Use expense management software to help flag policy violations when employees submit expenses.
3. Route approvals by amount and category
Configure approval workflows so routine expenses follow the appropriate approval path, while higher-value or out-of-policy charges receive additional review. This helps finance focus attention on transactions that require a decision.
4. Code expenses when they are submitted
Capture GL accounts, departments, projects, and applicable tax information at submission. Separate expense types with different tax treatments to reduce corrections during reconciliation.
5. Review recurring expenses before renewal
Review subscriptions, memberships, and other recurring costs quarterly. Confirm whether each expense is still needed and check cancellation deadlines before contracts renew.
6. Evaluate spending against business outcomes
Assess whether larger discretionary categories support measurable business goals. For example, review sales travel against pipeline opportunities or training expenses against program objectives before deciding where to cut.
How ExpensePoint helps manage discretionary expenses
ExpensePoint helps finance teams manage discretionary spending through existing corporate card integrations, configurable policy controls, approval workflows, and automated expense coding.
Connect your existing corporate cards
ExpensePoint works with supported commercial cards, so businesses can keep their existing card programs. ExpensePoint Realtime brings in eligible card transactions as they occur, giving finance earlier visibility into spending.
Flag policy violations at submission
ExpensePoint supports category daily limits, expense and transaction limits, and category conflict rules. These checks flag expenses that fall outside company policy before reports complete the approval process.
Apply GL coding and tax rules
ExpensePoint supports GL coding rules, Canadian GST/HST breakdowns, and separate handling of tips. Verify Match checks card transactions against receipts, including associated fees.
Sync expenses to your accounting system
ExpensePoint integrates with NetSuite, QuickBooks, Sage Intacct, Xero, and Microsoft Dynamics 365. Approved expenses can be transferred using configured accounting dimensions, helping finance track discretionary spending by category, department, or project.
Discretionary expenses give businesses flexibility to adjust spending as priorities change. Classifying costs correctly, applying clear limits, and reviewing recurring commitments helps finance control unnecessary spending while preserving expenses that support business goals.
Frequently Asked Questions
What are discretionary expenses?
Discretionary expenses are optional business costs that management can reduce, delay, or eliminate without disrupting essential operations. Common examples include travel, client meals, marketing campaigns, employee perks, and software upgrades.
What are examples of discretionary business expenses?
Examples include optional business travel, client entertainment, marketing campaigns, employee events, professional development, software upgrades, gifts, and office improvements. Whether an expense is discretionary depends on its business purpose.
What is the difference between discretionary and non-discretionary expenses?
Discretionary expenses can generally be adjusted through management decisions. Non-discretionary expenses are required for essential operations or to meet contractual and legal obligations, such as payroll taxes, rent, and required insurance.
Is business travel a discretionary expense?
Yes, business travel is often discretionary when trips can be postponed, cancelled, or replaced. Travel required to fulfill customer contracts or perform essential services may be non-discretionary.
Are discretionary business expenses tax-deductible?
Yes, qualifying discretionary expenses may be deductible. In the US, business meals are generally 50% deductible, while most entertainment expenses are not. In Canada, qualifying meals and entertainment are generally subject to a 50% deduction limit.
Is payroll a discretionary expense?
No. Contractual wages, salaries, and payroll taxes are generally non-discretionary. Optional bonuses and recognition awards may be discretionary when they are not contractually required.
Can a fixed expense also be discretionary?
Yes. Fixed describes whether an expense amount changes over a period, while discretionary describes management's ability to choose the expense. An annual software subscription may be fixed during its contract term and discretionary at renewal.
How can finance teams control discretionary spending without switching corporate cards?
Finance teams can use card-agnostic expense management software to connect existing commercial cards, enforce spending policies, route approvals, and code transactions. ExpensePoint supports these workflows and integrates with accounting and ERP systems.