Regardless of how small your company or sole proprietorship may be, there will come a time when you need to reimburse yourself or your employees for business-related expenses. Though you may not need a large accounting department to process expense reports every month, keeping track of expenses will benefit your business. It can increase deductions, maintain budgets, and categorize data for future projections.
While there are many ways to keep track of business expenses, setting policies and staying organized will keep the process smooth and painless for you, your employees, and your tax reporting. In this guide, you’ll learn when and how to write a business expense report.
- Expense reports are documents that detail the costs paid for personally by employees or business owners.
- Under an accountable plan, qualified business expenses are deductible for a company and reimbursable without incurring taxes for an employee.
- Companies should determine a clear reimbursement policy based on their industry, goals, and budgets.
- Templates and software can help in the business expense reporting process, but receipts or invoices are always required for reimbursable expenses.
What Is an Expense Report?
An expense report is a document detailing the personal cash outlay for qualified business expenses by an owner or employee(s).
Instead of issuing corporate credit cards or proactive per diems to each employee, employers may ask employees to pay for certain business expenses with their own money. If they are reimbursable expenses, the employee should fill out an expense report and submit receipts to be reimbursed.
Reimbursable expenses can include business-related travel or meals purchased when entertaining clients, for example, among other things.
The IRS allows reimbursements to be tax free for the employee and deductible for the business—but only if they are issued under an accountable plan. A certified public accountant (CPA) can help direct an accountable plan, but for reimbursements to qualify, the following conditions must be met:
- The expenses must have a business connection.
- The expenses must be substantiated within a reasonable period of time (using receipts).
- The employee must return any extra money to the employer within a reasonable period of time.
Under a non-accountable plan, any reimbursements will be taxed as W-2 wages.
The benefits of an accountable plan allow businesses to deduct business expenses, avoid paying employment taxes on reimbursements, and allow employees to further the company’s interests without fear of being taxed for their personal expenditures. A business must simply ensure the requirements are met for each expense to take advantage of these benefits, which is why expense reports are an important tool for owners and their accounting partners.
When Do You Need To Use Expense Reports?
Expense reports are necessary whenever an employee pays for business expenses with their personal money. In small businesses, this can be as simple as running out for milk and paying with personal cash or as complex as sending an employee to a conference to learn a new skill that will benefit the business. In the latter case, that employee will need to account for their travel, lodging, meals, incidentals, and various other expenses.
Certain roles may require more expense reporting than others. Sales people, consultants, or client-facing employees may incur personal expenses for meals, mileage, software subscriptions, and many other elements critical to executing their job. Submitting detailed and substantiated expense reports is crucial for these roles so that these employees are supported by the company and reimbursed for their efforts.
In some cases, employers may attempt to simplify travel-related reporting and reimbursements by using the federal per diem rates and standard mileage allowances. Both compute the deductible costs of using a car for business purposes. Per diem rates can vary depending on the region, though, so be sure to maintain detailed reports about each expense accumulated.
How To Write an Expense Report for Your Business
Expense reports will differ depending on your specific business and industry. Each reported expense should include the following:
- Date: the day that the expense occurred
- Details of the expense: the amount of the expense, what the expense was for (travel, purchasing an item, etc.), and which client is associated (if any)
- Details of the employee: name, department, etc.
- Substantiation: receipts, invoices, or other proof of expense
Determine What Will Be Reimbursable
Each company determines what qualifies as a reimbursable expense depending on their business goals, budgets, and industry. A hairstylist may be able to expense their tools and products, while a management consultant may be able to expense rental cars needed during frequent travels.
Qualified expenses are often laid out in the company handbook and/or an employee contract. You may not find every single expense outlined in a handbook, so it is always best to have it preapproved before personally fronting the money.
When building a reimbursement policy for your company, it’s important to consider your goals for growth and your budget. For example, if you have a product that will benefit from the exposure of conventions or trade shows, then you might build your policy as well as your travel and marketing budgets around those goals. Reimbursement policies are determined by the company, and you can always adjust them to fit your business objectives as your company grows, so long as those changes are clearly communicated to employees.
Customize a Template
There are many free templates of expense reports available online as well as via Excel and Google Sheets. Select the one that works best for your business, customize the columns to fit your business categories, and distribute the template to your employees along with instructions on how to fill one out. A good template will be simple to understand and include all the information needed to categorize the expense correctly.
Choose a Software
Employing technology may make the expense reporting process a little less painful. If you’re a sole proprietor or a very small business, an app like Expensify might suffice, allowing you to track and categorize expenses as well as take pictures of receipts on the go. Some more complex businesses might consider employing a full-time accountant to help with expenses and deductions in addition to more comprehensive software, such as Concur.
Linking expense reporting with payroll software can also streamline the reimbursement process. The key is finding the reporting solution that fits your company size and can be maintained accurately by you and your employees.
Frequently Asked Questions (FAQs)
How do I report an expense for a home business?
Under an accountable plan, a home office can be deducted by the business owner but not by an employee. Consult with an accountant to understand the deduction limits and other regulations for home businesses.
When are expense reports due?
The best practice for a company of any size is to require expense reports to be submitted monthly. Importantly, these reports must be submitted no later than 60 days after the expense was incurred, according to the IRS.