Expense management presents many challenges for a small business. Reining in expenses, maintaining controls over who is spending company funds and understanding tax implications all directly impact the bottom line. Creating a thorough expense report will help your business take advantage of tax deductions and ensure employees are reimbursed effectively.
Additionally, as businesses increasingly allow employees to work from home, many businesses are managing new and/or increased requests for reimbursement for remote work-related expenses. To boost short-term liquidity, many small businesses are taking a close look at where they can cut costs and what they are required to reimburse.
What Is a Small Business Expense Report?
An expense report tracks expenditures that employees incur during the course of performing business functions. One major purpose of expense reports is for reimbursement of expenses that employees paid for out-of-pocket or with a corporate credit card. We’ll cover both of those scenarios here.
- Done properly, expense reports allow businesses to receive tax deductions for reimbursements to employees.
- Organized reports help small business leaders understand where employees spent the most money and can make it easier to spot fraud.
- Small companies can use a basic Excel template for expense reports to record employee information and the relevant details for each expense over a certain period.
- As businesses mature, they can realize major benefits with an expense management system that automates much of the process.
Why Are Expense Reports Important?
A business that requires employees to submit expense reports can take advantage of tax deductions. When expenses are reimbursed under what is called an accountable plan, the reimbursements are not taxed as wages for the employee and the company can deduct the reimbursements as business expenses. Under non-accountable plans, reimbursements are treated and taxed as gross income to employees.
To be an accountable plan, the IRS requires expense reimbursement arrangements adhere to these three rules:
- The expense must have a business connection. The employee must have paid or incurred deductible expenses while performing services as an employee.
- The employee must adequately account to the employer for these expenses within a reasonable period of time. This is accomplished by giving the employer a statement of the expense (usually an expense report) and documentary evidence of the expense, such as receipts.
- The employee must return any excess reimbursement or allowance within a reasonable period of time.
Benefits of an Expense Report for Small Businesses
Requiring employees to submit expense reports for reimbursable businesses expenses can provide several advantages for small businesses. Here are three major benefits:
- Take advantage of tax savings. By requiring that employees submit expense reports for reimbursable business expenses, the business can take advantage of tax breaks by reimbursing them in accordance with accountable plan rules. Since expense payments can be deducted, that reduces the company’s tax burden.
- Better understand travel costs and other expense. With a regular expense reporting policy in place, small businesses can better understand sales and other employee-related expenses. A spike in airline fees will impact a small business that requires sales or service personnel to do extensive travelling, for example. Similarly, some businesses spend a lot on meals for clients or prospects. Formalized expense reports provide visibility into those costs and management can change guidelines to adjust spending accordingly.
- Refute questionable expenses and prevent outright fraud. Expense reports help the business see areas of high spend and make changes. This is important, as 56% of CFOs in a Robert Half Management Resources survey said they have seen an increase in the number of “inappropriate reimbursement submissions” from workers over the last three years. Some are easy to spot and decline without argument—a yacht, a trip to Italy and a pogo stick are three things executives told Robert Half they’ve seen employees try to expense. Others may slide through because their validity under the policy is less clear-cut, like childcare, crayons or bed bug removal.
What Should an Expense Report Include?
Improper expense claims may be the byproduct of an unclear or unrealistic expense policy or a poorly communicated one. And when the policy isn’t clear, there are cascading repercussions, including time spent completing, rejecting, resubmitting and processing expense and reimbursement claims.
Every expense report should include:
- The employee’s name
- The date of the report submission
- A number by which to reference it
- The name of the employee’s manager
- The period for which they are asking for expenses to be reimbursed
- An itemized list of each expense that includes:
- The date the expense was incurred
- The expense account from the chart of accounts that it should be linked to (i.e. employee travel, office supplies)
- The amount of the expense
- A detailed description of the expense, including what it was and where it was, and the business purpose or business relationship
- Receipts for all expenses, where possible
Mileage expense should include information on:
- The address of the beginning location
- The address of the ending location
- The exact mileage between those points
- The IRS federal standard mileage rate to calculate the total mileage reimbursement (the rate for 2020 is 57.5 cents per mile).
7 Steps to Create an Expense Report for Your Small Business
- If the business doesn’t have expense management software, start building a template in Microsoft Excel. There are plenty of free Excel-based templates available.
- The template should provide areas at the top of the form to enter basic information. This includes the employee’s name and/or employee identification number, the date the form is submitted, a reference number/invoice number, their manager’s name and the period for which the expense reimbursements are being requested.
- Create a column for the expense date. This is where the employee will enter the date that each expense was incurred.
- Create a column for the expense account on the chart of accounts that the expense will be reimbursed from. In Excel, this can be a drop-down menu in which the finance team has imported the most relevant expense accounts for employee reimbursement.
- Create a column for the expense amount. This is where the employee will enter the exact amount that matches their receipt.
- Create a column for expense description. The employee will describe what the reimbursement is being requested for and why it is a legitimate business expense.
- Ask employees to number receipts to match the rows that detail each expense.
Using Excel to Create an Expense Report
The steps above can direct an employee through manually creating and entering expenses into an Excel spreadsheet. Microsoft offers free Excel-based expense report templates. The example below is edited slightly to remove columns on entertainment, which under the Tax Cuts and Jobs Act no longer qualifies as a business expense and won’t be tax deductible.
Excel can be a useful tool to manage small business expense reporting, but a business may quickly find itself outgrowing the manual processes it requires. The Global Business Travel Association (GBTA) estimates it takes $58 on average to submit and process one expense report and an additional $52 to correct it. On average, 20% contain errors, each of which takes accounts payable staff 18 minutes to fix. Automating more of the process—from the generation of the expense report, to approvals, to integration with accounts payable—brings major efficiency gains.
Using Accounting and Expense Management Software
Expense management systems leverage technology like optical character recognition (OCR) to use a photo of a receipt to automatically populate fields in an expense report. This data collection technology simplifies expense reporting for the mobile workforce. Additionally, integration with GPS devices can create an easy and accurate way to record mileage.
Expense management software can also automatically flag charges that are outside of the policy and prohibit employees from proceeding with questionable expenses. It also routes reports to the right people for approval, ensuring proper controls and saving the accounts payable team time. And if the solution is linked with a business’s accounts payable software, it can streamline the payment process—something that both the accounting team and employees will appreciate.
Take Spark MicroGrants, for instance, a startup that gives seed grants to communities in East Africa so residents can start their own businesses. For each of the four countries across which it operates, it took the finance officer one day to reconcile all expense reports. The finance director would review those reports and come back with questions, leading to a lot of back and forth. Better expense management—namely, implementing expense management software—saved Spark MicroGrants 64 hours each month.
As companies start to resume business travel in the wake of COVID-19 and offer greater work-from-home flexibility, new issues are sure to arise. Businesses can prepare by simplifying policies and processes now, and ensure that the expense report isn’t an added stress for employees simply trying to do their jobs.