Employees often pay for business expenses out of their own pocket. For example, they might treat a client to dinner, use their personal vehicle for business travel, or pick up necessary office supplies in a pinch. Usually, when an employee spends money on the company's behalf, they do so with the expectation that they'll be reimbursed.
Rather than reimbursing individual expenses as employees incur them, most companies ask employees to request reimbursement with a document known as an expense report.
This article will explain what an expense report is, what it should include, and how to prepare one.
What Is an Expense Report?
An expense report is simply a form that employees (and, in some cases, partners or shareholders) use to report business expenses paid out of their own pocket. Depending on the company's expense reimbursement policy, employees may be required to attach receipts for all expenses included on the report or only those over a certain amount.
The business owner or accounting team then reviews the expense reports submitted by employees to confirm they're legitimate expenses and reimbursable according to the company's expense reimbursement policy.
Benefits of Using Expense Reports
Requiring expense reports might seem like unnecessary red tape for a small business. But having a formal expense reporting policy can benefit your company and your employees in several ways.
- Take full advantage of tax deductions. Many business expenses incurred by employees are tax-deductible. However, IRS rules require adequate documentation to support those deductions. Using expense reports ensures you keep track of all tax-deductible expenses that might not be reflected in your bank account statements.
- Streamlined expense reporting processes. Reimbursing individual expenses throughout the month can be time-consuming for your accounting team. Using monthly expense reports reduces processing time.
- Minimize expense reporting fraud. According to the Association of Certified Fraud Examiners, expense reimbursement fraud is one of the most common types of employee fraud, costing organizations an average of $1,400 per month. Using expense reports provides oversight and internal controls over expense reimbursements, limiting employees' temptation to seek reimbursement for fraudulent expenses.
- Avoid having expense reimbursements count as taxable income for employees. Expense reimbursement plans can either be accountable plans or nonaccountable plans. In a nonaccountable plan, the business gives employees a set amount, or allowance, to cover out-of-pocket work or travel expenses each month. Because employees don't have to account for how they spend the money, the allowance is considered taxable income for the employee and must be included on their Form W-2 at year-end. Requiring expense reports is one requirement of having an accountable plan and ensuring your employees don't have to pay taxes on those reimbursements. You can learn more about accountable and nonaccountable plans in IRS Publication 463.
What Information Should an Expense Report Include?
You can customize your company's expense report to fit your unique needs. But at a minimum, it should include the following:
- Date. The expense report should include the date the employee incurred the expense. This should match the date on the attached receipt.
- Vendor Name. Employees should provide the name of the vendor they paid for the item or service.
- Amount. The amount the employee paid for the product or service, including taxes. This should also match the amount on the attached receipt.
- Description. The employee should provide a brief description of what they purchased and, if not readily apparent, the business purpose of the expense.
- Subtotals and Totals. While not strictly necessary, including subtotals for different categories of business expenses and the total requested makes it easier for your bookkeeper to issue the reimbursement and code expenses to your company's accounting software.
Preparing an expense report from scratch can take a lot of effort. Fortunately, Microsoft has a basic expense report template for Excel available as a free download.
You may also want to look into expense reporting software. Several options on the market allow employees to capture receipts with a mobile app, digitally submit expense reports, and automate approvals and reimbursements.
Businesses need to account for their expenses. And while expense reports aren't a required part of running your business, they can help you claim valuable tax deductions and keep track of what employees are spending—all of which helps you run your business more efficiently.