Expense Report Everything to Know for Successful Business

In this article, we will go through some basic fundamentals of expense reporting. Once you fully understand the nature of an expense report, you’ll be sure to make the most of it and improve your business’s productivity and internal control.

Being in business is all about making a profit. But that profit isn’t only about your sales numbers. How to effectively control and minimize expenses is just as important as how to boost sales to achieve the ultimate goal: generate maximum profit. 

Caught between limited financial resources and the pressure to maintain competitive pricing, small businesses these days need to stay more proactive than ever to stay on top of their expenses. One of the most commonly used practices for managing costs among small enterprises is the expense report. 

What is an expense report for businesses?

An expense report is a document filled out by an employee or a partner so they can be reimbursed for professional expenses. They are also used to track company spending.

Expense reports are generally presented as forms, whether in a paper or a digital format. The report can be prepared using accounting software or using a template in Word, Excel, PDF, and so on. 

With the advent of new technologies, several solutions now exist to automate the expense management process. The purpose of these solutions is to free time up for everyone involved in the process, streamline expense reports management, and increase profit. 

What is an expense report used for?

Making reimbursements 

A small business sometimes has their employees pay for work-related expenses out of their own pockets then later, the business owner would make reimbursement for those expenses. This process is carried out by an expense report with 3 simple steps: 

  1. The employee fills in an expense report and lists all the business-related spending such as gas for vehicles, accommodation, or meals. Receipts should be attached to the document.  
  2. The employer checks the expense report for accuracy and validity. 
  3. The requested amount is paid back to the employee.

Sometimes, the process can be reversed in which the companies make advance payment for staff. The employee still needs to submit an expense report to detail expenditures. However, there won’t be any reimbursement. Instead, the employer will just deduct the expenses from the advances and have these transactions recorded in the bookkeeping system. 

Tracking expenses

An expense report is also a great tool to help small businesses keep track of their spending periodically (on a monthly, quarterly, or yearly basis). By reviewing expense reports, enterprises can examine their financial health, determine if they’re spending over or under budget, then analyze the causes and come up with immediate solutions to improve expense management. 

Shoeboxed expense report

Filing tax

Regardless of what type of business you run, filing a tax return is a real headache. From ancient times to the present, businesses have always learned ways to minimize their taxable amounts.

Many business expenses are deductible that can be subtracted from a company’s income before it is subject to taxation. Expense reports are the legal documents to prove just that. Creating an expense report allows you to monitor deductible costs that may not yet be shown on your company bank account, making it a lot easier to write such expenses off at tax time.

Auditing purposes 

Expense reports are valuable evidence for both internal and external audit activities. Unnecessary and fraudulent reimbursement claims are not, unfortunately, an uncommon theme in many workplaces. These reports can help with business audits by providing visibility into what funds are coming in and out of the business. By properly processing these expense reports, owners can examine the details and audit their current businesses’ financial and managerial health. 

As we’ve just mentioned above as well, expense reports are vital for deducting tax. They can be requested for submission as supplemental documents, in addition to reporting total applicable costs on tax forms when submitting taxes with the revenue service at any time. 

What does an expense report look like?

Small businesses usually create expense reports using templates in Word, Excel, PDF, etc, or have them automatically prepared by accounting software. No matter how an expense report is made, it typically should contain these elements: 

  • Employee’s information: name, department, position, their manager, or details of who submits the expense
  • Date: when expenditure was incurred (a receipt showing the same date should be attached)
  • Vendor: where a product or service was purchased
  • Description: the nature of the expense such as taxi fee, meal, or hotel
  • Account: where the expense should be charged to 
  • Amount: the total sum of the expense (this amount should also be on the provided receipt) 
  • Subtotal: the amount for each type of expense listed 
  • Subtraction: adjustments when there are any prior advances paid to the employee
  • The grand total: the final amount of reimbursement requested
  • Note: an extra explanation for any unidentified or unclear type of expenses. 

Sometimes, an expense report may also include a brief summary of the company’s policy regarding which kind of expense is not reimbursable. It’s a good way to remind employees before they submit their expenses, saving time for employers and also raising awareness of spending policies within the enterprise. 

An expense report may look different among small companies, depending on its nature of business as well as each company’s own preference. However, it should always tell you how much the expense is and what it was used for. 

Business expense categories 

One of the most important functions of using expense reports is to help small businesses collect data and categorize business expenses, many of which can be written off in a company’s taxes. Some of the most common expense categories include utilities, travel, office supplies, and rental expenses, but there are many more that small businesses, freelancers, and sole proprietors should pay attention to. 

According to the IRS, as long as an expense is “ordinary and necessary” to running a business in your industry, it’s deductible. That’s why we suggest you should follow the categories listed in the Schedule C form  from the IRS for your expense report if you run a sole proprietorship. Developing categories that match your business and a tax return file can make the tax filing process easier, smoother, save you time, and make sure you get all the deductions that you can.  

We’ve listed below the most common 10 business tax expenses that you can deduct with brief explanations of what’s covered, what’s allowed, and what’s not.

Advertising

You can fully deduct expenses related to promoting your business, including digital and print advertising, social media advertising, website design & maintenance, and the cost of printing business cards.

Business insurance and professional service

You can deduct the cost of your business insurance on your tax return such as business liability or workers compensation. Fees paid to an attorney, designer, architect, or other professionals directly related to operating your business are also tax-deductible.

Office supplies

You can write off office supplies including stationery, office cleaning service, drinks & snacks in the break room, and work-related software. Shipping and postage charges may also be deducted. Bear in mind that you may only deduct the expenditure of materials used in the current year.

Home office expenses

Small business owners who work from home cannot miss this information! Generally, you’d need a space that is regularly and exclusively used for businesses to be qualified for deduction. You can deduct $5 for every square foot of your home office which meets all the requirements, up to a maximum of 300 square feet.

Travel expenses

The first and foremost condition to write off travel expenses is that the travel is qualified as a business trip. Here are 3 rules to help you know whether your trip is qualified or not:

  • The trip must be primarily business-related.
  • The trip must take you away from your tax home, i.e. outside the city or area where your company is located.
  • As well as being away from your tax home, it must be substantially longer than a normal day’s work and it must require you to sleep or rest on the route.

Business interest

A business interest expense is the cost of interest on business loans required to keep operations running. Your deduction is generally limited to 30% of adjusted taxable income while it was up to 50% in 2020 due to Coronavirus. However, this limitation is not applied to small businesses (with average annual gross receipts of $25 million or less over a trailing three-year period), farms, or real estate investment enterprises.

Cell phone and internet bills 

You can deduct your entire bill if you have a dedicated business cell phone or Internet connection. It’ll be a little bit more complicated if you mix business with personal usage. In this case, you will need to calculate and deduct only the percentage used for work. 

Wages and benefits

If you run a small business and hire people, you may deduct their wages, benefits, and vacation expenses. However, don’t include your own wages because they’re not allowed to be deducted by the IRS. 

Donations 

Tax-deductible donations must meet certain criteria such as the organizations you give charity to have to be qualified. Examples of qualified institutions include religious organizations, nonprofit educational agencies, museums, local volunteer groups, etc. There will be different guidelines depending on the nature of your donations such as cash, food, clothing, etc.

Depreciation

When you deduct depreciation, you’re usually writing off the cost of a tangible asset like a vehicle or machinery over the useful lifetime of that item, rather than deducting it all in one go for a single tax year. It’s best to deduct depreciation for costly long-term business investments, so you’re reimbursed for the expense over the entire lifetime of use of the item. 

Medical expenses

You can claim insurance premiums and you’re self-employed and pay for your own health insurance, you can deduct your health and dental care insurance premiums. You can also claim medical care expenses, including doctor’s fees, prescription drugs, and home care.

By designing your expense report template based on Schedule C, you’ll find it much quicker and easier when inserting data into tax forms.

So get organized and save time and money!

What is a monthly expense report? 

A monthly expense report details company outlays paid over the course of a given month. These reports are not typically used for employee reimbursement, but rather to track company or department spending, allocate expenses to specific projects or clients and compare expenses to revenue to determine a company’s overall profitability. These reports are typically organized by category, or payee, and can be tremendously helpful for companies to coordinate planning, budgeting, and resourcing requirements. In times of financial difficulty, a monthly expense report can be used to check how costs can be cut or eliminated to improve profit. 

What is considered an expense? 

Not all costs are expenses. An expense is the cost of operations that a business incurs to generate revenue. It can be salary compensations for employees, train tickets fee, or rental for the office. The summary of all expenses is shown on Income Statements (Profit or Loss Statement) as deductions from the total revenue.

While businesses can write off many kinds of expenses, they are not allowed to claim their personal, non-business expenses as business deductions. They also cannot claim bribes, lobbying costs, penalties, fines, and contributions made to political parties or candidates. 

There’s also a common mistake among businesses when they write off “capital expenditure” as an expense. Capital expenditure (CapEx) is used to acquire, upgrade, and maintain tangible assets such as property, buildings, or equipment. Businesses must capitalize those expenses or write them off slowly over time as depreciation. For example, if you acquire a new oven for your bakery business, the oven should be capitalized and recorded as your asset, instead of a business expense. Identifying the nature of an expense will help you do your taxes properly and precisely. 

Essentially, companies should have strict rules regarding what can be considered a business expense. Employees should be informed thoroughly as well before submitting expense reports for reimbursement. 

Conclusion 

Expense reporting and analysis is an indispensable element of an effective cost management process. However, many small businesses struggle with keeping track of documents and receipts manually which ends up being time-consuming and unproductive.

Clear away that pile of documents and go paperless with Shoeboxed!

Shoeboxed creates clear and comprehensive expense reports that include images of your receipts. In just a few clicks, you can export, share or print the information you need for easy tax preparation or reimbursement.

6 (Truly Amazing) Tools to Help Grow Your Small Business

Business owners are constantly bombarded with online tools and services that claim to boost productivity and help manage the growth of their business, many of which fail to deliver their promises. This is a list of tools that do deliver, and truly help small businesses get to that next level.

Business owners are constantly bombarded with online tools and services that claim to boost productivity and help manage the growth of their business. In fact, a simple Google search for “online business tools” gives you close to 700 million results – quite the marketplace to choose from. 

But how often do those tools actually help a business grow? And how often do business owners find themselves signing up for those tools, only to never use them? Probably more often than not. Which is why Shoeboxed did some investigating and curated an eclectic list of helpful, wide-ranging tools for growing small businesses.

 

Grasshopper

Phone System Automation

1Grasshopper is perfect for businesses looking for a full-service virtual phone system. Their services include customizable toll free 1-800 or local phone numbers, main greeting messages (with the option to include information like hours and address, among other customizations), departmental and employee extension numbers, voicemail to email transcriptions, and more. If you have a sales or support team, or just simply want to automate your business’ main line to make it easier to communicate with your customers, Grasshopper has you covered. Pricing starts at $12/month.

Plus: Grasshopper has a free app that turns your smartphone into a business line, allowing business owners and entrepreneurs stay professional even when they’re not in the office.

 

Bookly

Online Bookkeeping

Bookly.co logoIf you’re looking for a cheaper way to outsource a  bookkeeper, Bookly is the way to go. Their software automates dreaded bookkeeping chores by reconciling transactions with your connected bank and credit card accounts. Users can also create customized reports and compare balance and transactions trends in real-time. Additional features include invoice delivery and multiple user account collaboration. Pricing starts at $99/month.

Plus: In addition to the software, Bookly provides users with a dedicated bookkeeper who can look over your data and make sure that finances stay up to date.

 

Upwork

Project Outsourcing

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Need someone to rebuild your website but have zero-to-little design or programming experience? Want to increase traffic to your blog or social media, but don’t have enough time to write the content? Or do you simply need professional marketing advice and have no idea who to reach out to? Whatever your business needs, Upwork helps you find freelance talent to get the job done. Quality work resonates with existing and potential customers, so the next time you’re contemplating whether or not to outsource the job – consider Upwork. There is no plan to sign up – all you pay for is the work done by the freelancer.

Plus: Upwork allows you to customize the talent you are looking for, including filters like location, specific skill-set, experience level, and more.

 

Insureon

Online Insurance Agency

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If you think it’s easy to hunt down cheap, reliable, and quality insurance for your business, then you’ve obviously never run a business before. But that hunt is exactly what Insureon does. Insureon is an online agency dedicated to helping small businesses find the best insurance protection. All you have to do is fill out a quick online application, and Insureon does the rest – they calculate your risk, leverage relationships with top-tier insurance companies, then email you the best quote on the market, including coverage and cost options. Quotes are free.

Plus: Insureon matches you with a specialized agent experienced in your specific industry, and work with you to identify the unique challenges and insurance types of your business.

 

OutboundEngine

Marketing Automation

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If you are a small business owner who absolutely dreads the marketing side of things, OutboundEngine will be your hero. They’ll help you run fully-automated marketing campaigns, highly-targeted to your specific audience. Services include professional email marketing campaigns, automated social media updates, lead-generating referral programs and custom-tailored content writing. It’s like having an entire marketing department but at the fraction of the cost. Pricing starts at $179/month.

Plus: Everything is personalized, so the pros working on your campaign dive deep into your market and industry before testing anything.

 

Shoeboxed

Receipt and Expense Management

5

 

Keeping track of receipts for bookkeeping and tax purposes is an exhaustive, daunting task. But for business and financial reasons it’s a highly scrutinized part of running a business — all business owners have to do it. The problem is, business owners absolutely hate doing it! Cue Shoeboxed. Shoeboxed scans, organizes and categorizes receipts and other business documents so that all of your important paperwork is fully searchable and accessible in the cloud. There is a free DIY plan and premium plans start at $9.99/month.

Plus: All receipt images are IRS-accepted, with vendor name, total amount, date of purchase and payment type automatically extracted once its submitted to Shoeboxed.

This list is not exhaustive, but we hope it provides a holistic approach to the types of useful services and tools that every small business owner needs as their business grows.

5 Receipts Small Business Owners Should Take Extra Care to Keep

Holding on to detailed receipts for expenses is one of your best defenses in an audit. Receipts also act as a log, allowing you to jot down important context about your (sometimes costly) expenses. Of course, not all receipts are created equal, so we’ve compiled a list of five, highly scrutinized receipts for which you’ll want to keep receipts.

Holding on to detailed receipts for expenses is one of your best defenses in an audit. Receipts also act as a log, allowing you to jot down important context about your (sometimes costly) expenses.

Of course, not all receipts are created equal, so we’ve compiled a list of five, highly scrutinized receipts you’ll want to keep.

1. Meal & Entertainment Receipts

Winning clients and building relationships are two of the many reasons we like to break bread with business contacts. Unfortunately, the line between “contacts” and friends is often blurred, making this an expense the IRS likes to scrutinize. For that reason, it’s best practice to keep receipts handy and properly documented in case of an audit. This includes recording information about who attended the meal and the purpose.

Shoeboxed Pro Tip: You can record this information using Shoeboxed in the “Notes” field for each receipt. When you submit an expense, simply include the initials of everyone who attended and a quick description of meeting purpose in the Notes section. Or if you use Magic Envelopes, you can jot down the information on the receipt and then add the information in the Notes field once the receipt has been processed. Simple as that.

Add a note to a Shoeboxed receipt by clicking on the Notes field in the receipt details
In the Shoeboxed web app, you can add receipt information like client name or meeting purpose under the “notes” section. Better documentation of Meals and Entertainment receipts will protect you from audits and verify that the expense is indeed deductible.

 

2. Receipts from Out of Town Business Travels

Out of town business travel generates tons of receipts from airline tickets, taxis, meals, laundry, lodging and more. Of course, business travel can also be mistaken for “pleasure”, making this another IRS favorite prone to audit scrutiny. Receipts verify what was purchased on the trip and also act as a travel log of where time on the business trip was spent. Some important factors that determine eligibility include: how much of the trip was personal in nature, if the trip was away from your tax home and if the amounts are justifiable.

Shoeboxed Pro Trip: When traveling, make it habit to submit receipts as you make the purchase — don’t wait until the end of your trip to document your paper trail. Using the Shoeboxed Receipt and Mileage Tracker app can help you achieve this, and it can also eliminate the possibility of losing a receipt. You wouldn’t want to lose reimbursement or deduction money because of a misplaced piece of paper!

Use Shoeboxed to track receipts on-the-go as you travel on business trips, like Uber ride receipts
1. Receipts verify business expenses used on business-related trips & keep a time log of your travel activities.

Use Shoeboxed to track receipts on-the-go as you travel on business trips, like Hotel stay receipts
2. Keeping track of receipts as you buy when traveling eliminates the risk of losing proof of purchase.

Use Shoeboxed to track receipts on-the-go as you travel on business trips, and then create expense reports to keep the deductible expenses organized
3. At the end of your trip, organize deductible receipts by creating expense reports right from your phone.

 

 

 

 

 

 

 

3. Vehicle Related Receipts

“Mixed use” assets, like a vehicle used for both personal and business purposes, require extra care to distinguish when they are being used for business and when they are not. Since only the portion of use that is for business should be counted in the company’s books, keeping clear and detailed records of when, where and why a vehicle is used for business purposes helps to establish what portion of use is business related.

The portion of use that is business related (e.g. 20% of use is for business) can then be applied against any vehicle related expenses (maintenance, parts etc). Always keep a detailed receipt (as opposed to a credit card statement) that lists what items or services the vehicle needs.  Remember, if an auditor can’t easily establish that a payment to Costco was for car tires and not for Tide, chances are that vehicle-related expense won’t be considered for business purposes.

Shoeboxed Pro Tip: Use the Shoeboxed Receipt and Mileage Tracker App to automatically track mileage using your phone’s built-in GPS when traveling to and from business meetings. Not only will the app record the precise start and end points of your trip for detailed documentation, but it will also apply the standard mileage rate.

Use Shoeboxed mileage tracking to keep accurate records of business expenses related to vehicle use
1. Drop a pin whenever you want to start, pause or end a trip to make sure you are maximizing deductible mileage rates.

Use Shoeboxed mileage tracking to keep accurate records of business expenses related to vehicle use
2. Adding a trip name and a note to distinguish the business-related nature of the trip will ensure it is deduction-friendly.

Use Shoeboxed mileage tracking to keep accurate records of business expenses related to vehicle use
3. Shoeboxed Mileage tracking syncs with your phone’s built-in GPS for accurate documentation of vehicle trips.

 

 

 

 

 

 

 

 

4. Receipts for Gifts

Gifts are a thoughtful way to build rapport, however, there are several nuances to be aware of. For example, deciphering whether concert or sporting event tickets are considered ‘gifts’ or ‘entertainment’ depends on whether or not the gift giver goes with their client or business prospect. Documenting this kind of information on the gift receipt is key to allowing your accountant to treat the expense correctly for tax purposes. For more detailed information on gift expense limits and interpretation, check out this publication.

Shoeboxed Pro Tip: If you want to keep better track of gift receipts, add a “Gift” category and assign that category to receipts that would be considered gifts for deduction purposes. You can also add information which can validate whether or not the receipt can be considered a gift in the “Notes” field under receipt details.

Manage receipts with Shoeboxed by using customized categories to organize expenses,
Add a “Gift” category and assign them to expenses that could be deducted as gifts. Organizing receipts by category can also help you and your accountant treat the expense correctly for tax purposes.

 

5. Home Office Receipts

Like vehicles, a home office is considered “mixed-use” and the expenses associated with claiming a home office are therefore closely scrutinized. The key to properly accounting for home office expenses is to establish what portion of the home and the home’s expenses the office represents. If the home office makes up 20% of the home’s space, for example, then this proportion of expenses is deemed common to both the home and home office such as rent, electricity, internet to name a few. Keeping the bills and proof of payment for the home expenses with the business’ files is important in case these home office related expenses are challenged. Be sure to read the IRS publication on home office expenses for more information on what shared use items do or don’t qualify.

Shoeboxed Pro Tip: Documents other than receipts (like bills and invoices that prove home office expenses) can also be used to protect your business in case of an audit. Luckily, you can upload a variety of documents to Shoeboxed — we don’t just scan receipts!

Shoeboxed can organize a variety of documents like bills, invoices and contracts to verify expenses, not just receipts
Home office deductions can get tricky because shared space with the “home” complicates the use of business expenses. Documents other than receipts (like bills and invoices that prove home office expenses) can be used to protect your business in case of an audit when receipts alone cannot distinguish home vs. office use.

An original version of this article was first published on the Shoeboxed Blog in November 2013 and was written by Ian Crosby, the CEO of Bench.co, an online accounting firm. This version has been altered to reflect IRS updates and new Shoeboxed features.