There are costs associated with doing regular business. Some of those costs are incurred directly by employees. Businesses use expense reports to track the amounts employees spend to do their jobs; employees are reimbursed for those business expenses. Expense reporting not only allows companies to mitigate cash flow but it is also invaluable at tax time.
What is an Expense Report?
An expense report is a form used to track money employees spend on business expenses. The form itemizes expenditures eligible for reimbursement. Receipts are typically also attached. Many companies use an expense report template to simplify the process for employees and ensure accuracy.
Once the expense report is approved, the employer reimburses the employees in the amount requested. Because documentation exists of the expense, the employer can then record the reimbursed amounts as a business expense, which factors into the amount of accounting profit and taxable profit recognized.
According to Accounting Tools, an expense report usually requires some basic essential information:
- Date the expenditure occurred (must match the receipt date)
- Description of the expense (such as airline tickets, meals, or parking fees)
- Amount of the expense (matches the amount of the related receipt)
- Account/department the expense was charged to
- Subtotal for each expense description
- Section to subtract any prior advances paid
- Grand total amount of reimbursement requested
The site notes on an expense report form may also include a summary of your company’s expense policy, which defines for employees which expenses will be reimbursed and which will not.
What are Expense Reports Used For?
An expense report reimburses employees who pay out of pocket for equipment, entertainment and travel expenses. These expenses can include hotel reservations, plane tickets, taking clients to lunch or filling the company truck with gas.
Yet expense tracking also allows companies to review how and where money is being spent— which is extremely helpful when determining budgets. For example, expense data helps companies determine how many conventions they can send employees to or how much fuel it will take to power the machines needed to complete a job. Being able to track how each department spends money helps keep expectations accurate and budgets balanced.
Expense reports are also used for tax preparation. For many businesses, employee expenses can be written off in the company’s taxes. Common business expenses include travel expenses, rent, insurance, loan interest and vehicles. During tax preparation, companies use IRS forms to list their applicable deductions. Sole proprietorship’s, for example, use Schedule C to list all of the business expenses that can be deducted from their taxes.
IRS Expense Categories
According to the IRS, a deductible business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business, like gas, materials or meals. A necessary expense is one that is helpful and appropriate for your trade or business, like advertising or contract labor. An expense does not have to be indispensable to be considered necessary.
Yet the IRS notes business expenses are separate from other expenses like the cost of goods sold, capital expenses and personal expenses.
The Cost of Goods Sold expenses include:
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
- Factory overhead
Capital expenses are considered business assets and include:
- Business start-up costs
- Business assets
Personal expenses generally cannot be deducted unless you have an expense for something that is used partly for business, like a mobile phone, Wi-Fi or your vehicle. To determine the deduction, divide the total cost between the business and personal parts and deduct the business part.
- Retirement Plans
- Rent (Note: If you have or will receive equity in or title to the property, the rent is not deductible.)
- Business Loan Interest
- Various Federal, State and Local Taxes
Create an Expense Policy
Creating an expense policy is essential to staying compliant when reporting deductions. According to IRS Publication 15, an accountable plan must be in place. Otherwise, employee expenses are treated as supplemental wages and are subject to withholdings like social security, Medicare and taxes.
Once you understand what’s deductible and what isn’t, your company must decide on how to reimburse employees for their expenses. A standard form is ideal, but many companies opt to also provide corporate cards to employees who frequently incur expenses. Corporate credit cards are given so employees don’t need to use their personal cash or credit cards. One plus with these cards is that expenses are itemized on digital statements. Be aware, amounts charged to these cards are still subject to the IRS rule of any expense over $75 requiring a receipt, especially if the expense isn’t clear on the electronic statement.
The IRS also states that employees must submit an expense report within 30 days after returning from a business trip or incurring an entertainment expense but no later than 60 days from the date of the expense.
Specific Employee Business Expense Examples
IRS Schedule C instructions lists several categories for deductible business expenses. Many of these may be incurred directly by employees, including:
Car and truck expenses. All operating costs, gasoline, oil, repairs, insurance, license plates, etc., can be deducted, or companies can reimburse employees using the standard mileage rate of $.58 per mile. The IRS notes that if your business has five or more vehicles you must use actual expenses rather than the standard mileage rate.
Office expenses and supplies. These expenses might present themselves specifically for 2020 as many workers transitioned from working in the office to working at home. Office expenses include the cost of running your office and its supplies. These items might include paper, stamps, computer software, ink, books, professional instruments, internet use and so on.
Travel and meals. Travel and meal expenses include both actual and incidental expenses. Actual expenses comprise items like airline tickets, hotel stays and meals. Incidental expenses include baggage fees and tips given to hotel staff. For sole proprietorships, in most cases only 50% of meal expenses can be deducted.
Staying Compliant with IRS
While employee expenses can provide some tax relief, there are always expenses which you cannot deduct as a business.
IRS Publication 529 states that you can no longer claim any miscellaneous itemized deductions that would have been subject to the 2% of adjusted gross income limitation. These miscellaneous deductions include:
- Appraisal fees for a casualty loss or charitable contribution
- Casualty and theft losses from property used in performing services as an employee
- Clerical help and office rent in caring for investments
- Credit or debit card convenience fees
- Depreciation on home computers used for investments
- Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust
- Fees to collect interest and dividends
- Hobby expenses, but generally not more than hobby income
- Indirect miscellaneous deductions from pass-through entities
- Investment fees and expenses
- Legal fees related to producing or collecting taxable income or getting tax advice
- Loss on deposits in an insolvent or bankrupt financial institution
- Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you
- Repayments of income
- Repayments of social security benefits
- Safe deposit box rental, except for storing jewelry and other personal effects
- Service charges on dividend reinvestment plans
- Tax advice fees
- Trustee’s fees for your IRA, if separately billed and paid
Exceptions to these rules apply for businesses that fall into one of the qualified categories of employment. These categories include:
- Armed Forces reservists
- Qualified performing artists
- Fee-basis state or local government officials
- Employees with impairment-related work expenses
It is always advisable to consult with your local CPA, who is informed on your specific state laws, in order to remain compliant with state tax rules. One of the best ways to ensure ongoing compliance on the business end is to create an internal expense policy.
Expense Report Templates Examples
Using an expense report template is an easy way to start tracking employee expenses. Many templates already exist and just need to be tweaked to work for your company.
Once you create a process for expense tracking, make sure your HR software can help automate the process. Arcoro’s HR Software gives companies the ability to manage their talent in multiple areas including benefits, payroll and compensation. With built-in integrations, data is synced in real-time between our HR and payroll software modules. An employee portal provides transparency that allows employees to:
- Manage PTO
- Clock in and out
- Review and select their benefits
- Download and print pay stubs, W-2 and ACA forms
- Track goals and manage performance
- Submit expense reports
- Take surveys
- Access company documentation, and more
HR administrators can configure the features, content available and access based on company priorities and other internal rules concerning which expenses you’ll reimburse. An employee portal allows your employee to automatically submit expenses so you can focus on more meaningful projects, rather than playing detective to track down expense reports and receipts.