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.
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:
Discretionary does not necessarily mean wasteful. For example, attending a sales conference may be optional but still generate valuable business opportunities.
Common discretionary business expenses include:
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 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 |
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.
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.
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:
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.
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.
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.
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.
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.
Set budgets for categories such as travel, entertainment, and software. Assign a department owner to approve spending and review actual expenses against the budget.
Define transaction limits, daily category limits, and documentation requirements. Use expense management software to help flag policy violations when employees submit expenses.
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.
Capture GL accounts, departments, projects, and applicable tax information at submission. Separate expense types with different tax treatments to reduce corrections during reconciliation.
Review subscriptions, memberships, and other recurring costs quarterly. Confirm whether each expense is still needed and check cancellation deadlines before contracts renew.
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.
ExpensePoint helps finance teams manage discretionary spending through existing corporate card integrations, configurable policy controls, approval workflows, and automated expense coding.
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.
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.
ExpensePoint supports GL coding rules, Canadian GST/HST breakdowns, and separate handling of tips. Verify Match checks card transactions against receipts, including associated fees.
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.