What is a discretionary expense?

A discretionary expense is any ordinary business cost that is not strictly necessary for day-to-day operations but may support growth, employee satisfaction, or brand development. These expenses are typically incurred by choice rather than obligation and may vary from period to period based on business performance, priorities, or budget constraints.

How to categorize discretionary expenses

Record under Operating Expenses on the income statement.
Use clearly defined categories (such as Marketing, Training, or Employee Perks) rather than lumping them into miscellaneous accounts.
Review discretionary spending regularly to assess return on investment.
Set budgets or approval thresholds to control optional spending.
Keep receipts and notes explaining the business purpose of each expense.

Examples of discretionary expenses

Marketing and advertising campaigns.
Employee perks, meals, or team events.
Professional development, training, or conferences.
Office upgrades or nonessential decor.
Travel upgrades beyond standard business needs.
Sponsorships, donations, or community events.
Branded merchandise or promotional items.

Tax implications for discretionary expenses

Discretionary expenses may be tax-deductible if they are ordinary, necessary, and directly related to business activities.
Expenses that are primarily personal or excessive may not be deductible.
Some categories (such as meals, entertainment, or gifts) have specific deduction limits or rules.
Clear documentation is essential to justify the business purpose of optional spending.
Deduct eligible discretionary expenses on Schedule C or under the appropriate operating expense categories on business tax returns.