You look at your bank account. It says you have $50,000. You feel like a king, or at least like a person who can afford a decent steak dinner and maybe that new ergonomic chair that looks like a spaceship. But then your accountant calls. They tell you that you’re actually in the red for the month. How? It’s because of everything you’ve incurred but haven't actually paid for yet.
Money is slippery.
In the world of business and tax law, "incurred" is a word that carries a lot of weight, yet most people treat it like some boring vocabulary word from a high school economics quiz. It’s not. It’s the difference between running a profitable company and accidentally committing tax fraud or going broke while your dashboard shows a surplus. Basically, an incurred expense is a cost you’re legally obligated to pay because the transaction has already happened, even if the cash is still sitting in your wallet.
The Messy Reality of Incurred vs. Paid
If you buy a pizza with cash, you’ve incurred the cost and paid it at the same exact time. Simple. But businesses don't work like pizza shops.
If you hire a contractor to fix your office roof in December, and they finish the job on December 28th, you have incurred that expense the moment the shingles are nailed down. Even if you don't get the invoice until January 5th and don't actually cut the check until February, that "loss" belongs to December.
Why does this matter? Taxes.
The IRS, and most global tax authorities like the HMRC in the UK, generally care about when an obligation was born. Under the accrual method of accounting, you record the expense when it’s incurred. If you’re using the cash method, you wait until the money leaves. Most growing companies eventually have to switch to accrual because it’s the only way to see the truth of your financial health. If you only look at cash, you’re looking at the past. If you look at incurred costs, you’re looking at your actual obligations.
📖 Related: Private Credit News Today: Why the Golden Age is Getting a Reality Check
The "All-Events" Test
The IRS uses something called the "all-events test" to figure out if you've truly incurred an expense for tax purposes. It sounds like a track and field meet, but it’s actually a three-part hurdle:
- All events have occurred that establish your liability.
- The amount of that liability can be determined with reasonable accuracy.
- "Economic performance" has occurred.
That third one is the kicker. You can't just prepay for five years of consulting and claim you "incurred" it all today to lower your tax bill. Economic performance means the service actually has to be provided to you. If the consultant hasn't consulted yet, you haven't incurred the cost. You’ve just made a deposit.
Where People Get It Wrong
People often confuse "incurred" with "accrued." They're cousins, but not twins.
Incurring is the act of becoming liable. Accrual is the accounting entry you make to keep track of it. Think of it this way: if you use electricity all month, you are incurring a cost every time you flip a light switch. At the end of the month, your accountant will accrue an estimate for that utility bill so the books stay accurate, even before the utility company sends the bill.
I’ve seen business owners get blindsided by this during acquisition talks. A buyer looks at the books and sees a bunch of "unrecorded incurred liabilities." Maybe it's unused vacation time that employees have earned. In many states, that's a debt the company owes. You’ve incurred the cost of those vacation days every hour your team works. If you haven't accounted for it, your company is worth less than you think it is.
It's kinda scary, honestly.
👉 See also: Syrian Dinar to Dollar: Why Everyone Gets the Name (and the Rate) Wrong
Real-World Examples of Incurred Costs
Let's talk about insurance. This is a classic example. You pay your annual premium in January. But you haven't "incurred" the whole cost in January. You incur it bit by bit, every day that the insurance company provides you with coverage.
Or consider a legal dispute. If your company gets sued in 2024 and you lose the case in 2025, when was the expense incurred? Usually, it's when the "all-events" test is met. If you knew you were going to lose and could estimate the cost, you might have to record that liability way before you actually send the wire transfer to the lawyers.
The Legal Side: Incurred in Personal Injury
It’s not just for MBAs. In personal injury law, "medical expenses incurred" is a massive point of contention.
If you get in a car wreck, the hospital might bill you $50,000. However, your insurance company might have a deal where they only pay $15,000. What was the "incurred" cost? Is it the sticker price or the negotiated rate? Courts across the U.S. are split on this. Some say the jury should see the full $50,000 because that's what was incurred at the time of service. Others say that's a "phantom value" and only the $15,000 matters.
This tiny linguistic distinction can change a settlement by hundreds of thousands of dollars. It’s not just semantics; it’s math that affects real lives.
How to Manage Your Incurred Liabilities Without Losing Your Mind
If you're running a business, you need to stop living out of your checkbook. It’s a dangerous habit.
✨ Don't miss: New Zealand currency to AUD: Why the exchange rate is shifting in 2026
- Review your "Accounts Payable" weekly. This is literally a list of things you've incurred but haven't paid. If this list is growing faster than your "Accounts Receivable," you’re headed for a cash crunch, even if your bank balance looks healthy right now.
- Watch out for the "January Surprise." Many businesses incur massive costs in November and December (holiday bonuses, end-of-year inventory pushes, heating bills) but don't pay them until January. If you don't account for these in the year they happened, your year-end profit report is a lie.
- Talk to your vendors about terms. Sometimes, you can incur a cost but negotiate "Net-60" or "Net-90" terms. This gives you a cushion, but you have to remember that money is already "gone" from a balance sheet perspective.
The Psychological Trap
There is a psychological phenomenon where we feel richer when we have cash in hand. It’s why people overspend on credit cards—the "incurred" cost doesn't feel real until the statement hits.
In business, this is fatal.
You have to train your brain to see that $50,000 in the bank and immediately subtract the $12,000 in payroll you've incurred this week, the $5,000 in rent that's "due" even if the landlord hasn't called, and the $3,000 in taxes you're racking up with every sale.
What’s left? That’s your actual money.
Actionable Steps to Tighten Your Books
The first thing you should do is check your accounting software. Look for a report called the "Aged Payables" report. This shows you exactly what you have incurred and how long you've been sitting on it. If you see things over 30 days, you're not just incurring costs; you're risking your reputation with suppliers.
Next, do a "Liability Audit." Look at your contracts. Do you have any "evergreen" clauses where you're incurring monthly fees for software nobody uses? Those are incurred costs that are basically leaks in your boat. Plug them.
Lastly, if you're still using "Cash Basis" accounting and your revenue is over $1 million, talk to a CPA about moving to "Accrual." It’s a pain to switch, but it’s the only way to truly understand what your business is doing. You’ll finally see the connection between your actions today and the bills of tomorrow.
Stop looking at what you've paid. Start looking at what you've incurred. That's where the truth lives.