Whether you operate a small retail shop, run a busy hospitality venue, or manage a team in the healthcare sector, understanding reimbursable expenses is crucial. Not only does it help you stay compliant with tax regulations, but it also ensures your employees are fairly compensated for out-of-pocket costs incurred on behalf of your business. In this article, we’ll explore reimbursable expenses, why they matter, and how to create an effective expense policy that benefits you and your team.
We’ll cover the key IRS rules, state-level considerations, and real-world examples of everyday reimbursable expenses like travel, meals, office supplies, and home office costs. Along the way, you’ll discover how to set up record-keeping practices and policies with regulators that keep you out of hot water. Let’s dive in and clarify the essentials of reimbursable expenses.
What Are Reimbursable Expenses and Why Do They Matter?
In a nutshell, reimbursable expenses are expenditures made by employees or business owners on behalf of a company that the company later pays back. For instance, if one of your team members buys office supplies with their personal funds to stock up at a local store, you would reimburse them so they don’t foot the bill. In many cases, these sums can also be deducted from your company’s taxable income—provided you follow the appropriate guidelines set by the IRS and your state’s laws.
For small business owners, clarity around reimbursable expenses matters for three main reasons. First, it preserves trust within your team: employees feel more comfortable making necessary purchases if they know they’ll be promptly and fully paid back. Second, it keeps your bookkeeping accurate, which is essential for financial planning and auditing. And third, it helps you comply with federal and state regulations, avoiding penalties or additional tax liabilities.
Common Categories of Reimbursable Expenses
While reimbursable expenses vary across industries, certain categories show up repeatedly. Let’s look at a few you might encounter, along with some official references:
- Travel-Related Expenses: Cover the cost of flights, train tickets, mileage for personal cars, lodging, and meals. According to IRS Publication 463, you can generally deduct travel expenses if they’re “ordinary and necessary” for your industry or line of work.
- Office Supplies and Equipment: Items like paper, ink cartridges, or minor electronics such as external hard drives. Refer to the IRS Tangible Property Regulations for guidelines on expensing versus capitalizing these purchases.
- Home Office Expenses: If certain employees work remotely, your business might choose to reimburse a portion of their home office costs. IRS Publication 587 details the requirements for a qualifying home office space.
- Professional Services and Education: Membership fees for professional organizations, conferences, and training sessions that help employees develop new skills. The SBA’s guidelines on startup costs provide a useful reference for how these might be accounted for.
- Entertainment (Under Strict Limits): Changes to tax laws have tightened the scope of entertainment expenses. Check IRS Publication 463 to determine whether an expense qualifies.
It’s important to note that reimbursable expenses must primarily serve a business purpose to be valid. Personal expenditures disguised as business costs can lead to trouble if you’re ever audited, so clarity is key.
Accountable vs. Nonaccountable Plans
The IRS categorizes expense reimbursement methods into two main buckets:
- Accountable Plan: Under this arrangement, employees must provide documentation (receipts, mileage logs) and return any excess advance within a set period. If managed correctly, reimbursements under an accountable plan are not taxable to the employee.
- Nonaccountable Plan: Employees are not required to validate expenses, so these payments often count as income and are subject to payroll taxes.
Most small business owners prefer an accountable plan because it offers tax advantages and promotes better record-keeping. To qualify as an accountable plan, you must comply with IRS rules outlined in Publication 463, which require written documentation of the business nature of each expense. This process can feel a bit tedious, but the tax savings and clean bookkeeping are typically worth the effort.
Key Steps in Substantiating Reimbursable Expenses
Maintaining accurate records is vital for preserving the tax-deductible status of reimbursable expenses. Whether you’re a small retail owner or a mid-sized supply chain operator, the following steps ensure your documentation is on solid ground:
- Keep Receipts and Invoices: Every expense should have a receipt or invoice detailing the date, amount, vendor, and business purpose.
- Track Mileage: If employees use personal vehicles, keep logs noting the date, miles driven, and reason for the trip.
- Separate Bank Accounts: Business and personal funds shouldn’t mingle. Dedicated bank accounts make it easier to distinguish legitimate business expenses.
- Formal Reimbursement Policy: Outline exactly what qualifies for reimbursement and how employees should submit requests. This policy can be part of your employee handbook or a standalone document.
Consider adopting a cloud-based expense management system for multi-location teams to streamline submissions and approvals. Software like Shyft (best known for scheduling, but relevant if you’re looking for digital workforce solutions) can sometimes integrate with expense tools, simplifying administrative tasks.
State-Level Nuances and Compliance
Although federal guidelines set the broad contours, state-level rules often layer on additional requirements. In states like California, the law explicitly requires employers to reimburse employees for expenses directly tied to job duties (including personal cell phone usage if used for work). Similarly, certain states may impose minimum wage considerations—if unreimbursed expenses push an employee’s effective pay below the mandated hourly rate, you could face penalties.
When in doubt, check your state’s Department of Labor resources. For example, the California Department of Industrial Relations outlines rules for expense reimbursement. If you operate in multiple states, develop a comprehensive policy that meets the strictest requirements, ensuring universal compliance.
Creating a Bulletproof Reimbursement Policy
Even small businesses benefit from well-documented policies. Here’s how to structure one that minimizes confusion and fosters transparency:
- Written Guidelines: Specify which expenses are reimbursable (and which are not), how to submit claims, and the submission timeframe.
- Clear Approval Workflow: Decide if direct managers or department heads need to sign off on expenses. This ensures accountability and helps prevent mistakes.
- Set Deadlines: Some companies allow up to 30 or 60 days from the time the expense was incurred. Make your policy known so employees submit receipts promptly.
- Periodic Audits: Conduct random checks on expense reports. Not only does this deter fraudulent claims, but it also pinpoints any unintentional errors early on.
A thorough reimbursement policy provides peace of mind for employees and a layer of protection for you. It spells out exactly what’s allowed and how to document it, preventing disagreements or misunderstandings down the road.
Reimbursable Expenses for Small Business Owners
What if you are the sole proprietor or part of a family-run business? Many new entrepreneurs assume anything purchased with personal funds for business reasons is automatically deductible. However, you should still follow the same guidelines—keeping receipts, tracking mileage, and separating your personal and business finances as much as possible.
For sole proprietors, reimbursable expenses appear on Schedule C of your personal tax return. For S Corps or C Corps, you may pay yourself a salary and use an accountable reimbursement plan. Be mindful if you own more than 2% of an S Corp’s stock, as certain fringe benefits and deductions have special rules.
Summary: Simplify Your Reimbursable Expenses Strategy
Reimbursable expenses are more than just an accounting formality. They keep your operation transparent, fair, and aligned with federal and state regulations. Whether you manage a bustling retail store, a growing healthcare clinic, or a hospitality business, mastering expense reimbursement is a stepping stone to smoother financial management. Adhering to IRS guidelines, maintaining strong documentation, and staying current on state laws’ll reduce administrative headaches and build trust within your team.
Interested in taking other steps to cut down on wasteful spending? Check out our article on how to reduce administrative costs. Strategic tools and platforms can help you optimize not only expense reimbursements but also shift scheduling, payroll management, and overall resource allocation.
Conclusion
A coherent process for reimbursable expenses is essential for running a compliant and financially healthy business. From strictly following the IRS’s accountable plan rules to keeping an eye on evolving state regulations, each step you take bolsters your bottom line and your team’s trust. The ability to accurately capture and repay these costs can also provide valuable data to guide future budgeting and strategic decisions.
If you’re looking for ways to streamline processes beyond expense management, consider adopting software solutions for small and medium businesses. Tools like Shyft can help you manage schedules and shift swaps, potentially syncing with or complementing other financial systems for a smoother administrative workflow. Ultimately, controlling reimbursable expenses is a part of a broader strategy for making your business more efficient and your team more empowered.
FAQs About Reimbursable Expenses
Q1: Do I need to keep physical receipts for every expense?
A1: While physical receipts are ideal, digital receipts can also suffice as long as they provide key details such as amount, date, vendor, and business purpose. Many businesses encourage employees to scan receipts and attach them to digital expense reports.
Q2: Are meals still reimbursable under new tax rules?
A2: Yes, but with limitations. Meals can be reimbursable if they serve a legitimate business purpose. Typically, only 50% of certain meal costs are tax-deductible under IRS guidelines, though there have been temporary exceptions in the past.
Q3: How do state laws differ from federal laws on reimbursable expenses?
A3: States may impose stricter or additional requirements. For instance, some mandate employers reimburse personal cellphone use or mileage to keep an employee’s pay above the local minimum wage. Always consult your state’s labor department or a qualified advisor for specifics.
Q4: How soon should employees submit their expenses?
A4: Most experts recommend 30 days, though some businesses give 60 days. The IRS doesn’t specify a universal timeline, but a “reasonable period” is required under accountable plan rules.
Q5: Can I reimburse expenses if I’m a sole proprietor?
A5: Yes, but the documentation standards remain. Even if you’re the only person involved, maintain clear records of business expenses. Doing so simplifies your tax filing and can help you if an audit occurs.
1. Definition and Importance of Reimbursable Expenses
Reimbursable expenses are costs that employees or business owners incur on behalf of the company and that the company repays them for. Properly tracking these expenses is critical because it ensures compliance with federal and state tax rules, helps maintain accurate accounting records, and clarifies what costs are considered business expenses vs. personal expenses.
Key IRS Guidelines
- IRS Publication 535 (Business Expenses): Explains common business expenses and whether they are deductible.
Source: https://www.irs.gov/publications/p535 - IRS Publication 463 (Travel, Gift, and Car Expenses): Details rules on travel, entertainment, and automobile expenses, and discusses accountable vs. nonaccountable plans.
Source: https://www.irs.gov/publications/p463
2. Types of Reimbursable Expenses
Travel-Related Expenses
These typically include transportation (flights, trains, mileage for personal vehicles), lodging (hotels, rentals), and meals (subject to per diem or substantiation rules). Incidentals such as baggage fees and tips for service staff are also common.
References & Resources (Travel)
- General Services Administration (GSA) Per Diem Rates: Offers daily lodging, meals, and incidental rates for federal employees; often used by private companies as a benchmark.
Source: https://www.gsa.gov/travel/plan-book/per-diem-rates
Office Supplies and Equipment
- Examples: Stationery, printer paper, ink cartridges, small equipment (e.g., external hard drives, keyboards).
References & Resources (Office Supplies and Equipment)
- IRS Tangible Property Regulations: Provide guidelines on which purchases can be expensed vs. capitalized.
Source: https://www.irs.gov/businesses/corporations/tangible-property-final-regulations
Home Office Expenses
If the business has a reimbursement policy and the home office meets specific IRS requirements, a portion of rent or mortgage interest, utilities, internet, etc., may be reimbursable.
References & Resources (Home Office)
- IRS Publication 587 (Business Use of Your Home): Explains how to determine if your home office qualifies and how to calculate expenses.
Source: https://www.irs.gov/publications/p587
Professional Services and Education
These include professional membership fees (e.g., industry associations), conference fees, continuing education, and certifications.
References & Resources (Professional Services and Education)
- SBA (Small Business Administration) on Startup Expenses: Includes guidelines on typical business expenses and tax implications.
Source: https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs
Entertainment (Strict Limitations)
Certain entertainment expenses were historically deductible or partially reimbursable, but recent tax law changes have significantly limited this. They must be directly related to a business activity (e.g., a working meal with a client).
References & Resources (Entertainment)
- IRS Publication 463: Covers which entertainment expenses qualify and how to substantiate them.
Source: https://www.irs.gov/publications/p463
3. Accountable vs. Nonaccountable Plans (Tax Implications)
The IRS distinguishes between two primary reimbursement methods:
- Accountable Plan: Employees must substantiate expenses (e.g., receipts, mileage logs), and excess reimbursements must be returned. These reimbursements are not reported as employee income.
- Nonaccountable Plan: Little or no substantiation is required. Reimbursements are generally treated as wages for tax purposes and reported on employees’ W-2 forms.
References & Resources (Accountable vs. Nonaccountable)
- IRS Publication 463 (Chapter on Accountable and Nonaccountable Plans)
- 26 CFR § 1.62-2 (Internal Revenue Code): Detailed regulations on “Reimbursements and other expense allowance arrangements.”
Source: https://www.ecfr.gov/current/title-26/section-1.62-2
4. Substantiating Reimbursable Expenses
To remain compliant and protect the deductibility of expenses, consider the following:
- Keep Receipts and Invoices: Document what was purchased, the amount, date, and purpose.
- Maintain Mileage Logs: Track the date, distance, and business purpose of each trip.
- Use a Dedicated Business Account/Card: Separates personal and business transactions.
- Adopt a Formal Reimbursement Policy: Define eligible expenses, submission procedures, and required documentation.
5. Common State-Level Considerations
While IRS rules govern federal tax treatment of reimbursable expenses, states may have additional requirements or nuances related to income tax, workers’ compensation, labor laws, and minimum wage adjustments.
State References & Resources
- California Department of Industrial Relations – Reimbursement for Work Expenses: https://www.dir.ca.gov/dlse/
- New York State Department of Labor: https://dol.ny.gov/
- Massachusetts Office of Labor and Workforce Development: https://www.mass.gov/orgs/office-of-labor-and-workforce-development
Always check your specific state’s Department of Revenue or Department of Labor for the most accurate and up-to-date information.
6. Best Practices for Structuring a Reimbursement Policy
- Written Policy: Draft a clear policy outlining procedures, eligible expenses, and required documentation.
- Expense Report Templates: Provide standardized forms or software for submission.
- Submission Deadlines: Require employees to submit expenses within a set timeframe (e.g., 30 or 60 days).
- Managerial Approval: Have a manager or finance rep review each request.
- Periodic Audits: Conduct spot checks on expense reports to confirm compliance.
7. Special Considerations for Small Business Owners or Sole Proprietors
For sole proprietors, partnerships, and single-member LLCs, owner draws aren’t the same as reimbursable business expenses. If the business and personal accounts aren’t strictly separate, carefully track expenses you pay personally on behalf of the business.
- IRS Schedule C (Form 1040): Where sole proprietors typically report business income and expenses.
Source: https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
For S Corps or C Corps, employee-shareholders can have accountable plans, but rules can be stricter—especially for 2%+ shareholders in S Corps regarding certain fringe benefits and reimbursements.
8. Key Takeaways
- Follow Accountable Plan Rules: Proper documentation avoids payroll tax complications and keeps reimbursements non-taxable for employees.
- Know Your Limits and Rates: Use IRS standard mileage rates or GSA per diem rates for convenience, and review them yearly.
- Check State Requirements: Some states have stricter guidelines than federal rules.
- Maintain Accurate Records: Good recordkeeping protects both employee and employer, especially if audited.
9. Additional Authoritative Resources
- IRS Small Business and Self-Employed Center: https://www.irs.gov/businesses/small-businesses-self-employed
- Small Business Administration (SBA) – Managing Your Finances: https://www.sba.gov/business-guide/manage-your-business
- State-Specific Departments of Revenue: E.g., California Franchise Tax Board, New York State Department of Taxation and Finance, etc.
Conclusion
Reimbursable expenses are a cornerstone of business operations, particularly for small organizations aiming to maintain financial controls and stay compliant with tax laws. By adhering to IRS guidelines, being mindful of state-specific requirements, and implementing thorough record-keeping and approval processes, small businesses can efficiently and lawfully manage reimbursable expenses.
Using the references above, you can build a detailed, state-compliant guide that covers everything from daily expense tracking to the nuances of accountable plans. Always remember: if in doubt, consult a tax professional or refer directly to official IRS and state publications to ensure your reimbursement policy meets all legal requirements.