Revenue expenditure is one of the most confusing concepts and usually gets mixed up with capital expenditure. The confusion between these two types of expenditures can lead to severe consequences for your taxes and decision-making as your accounting figures might change significantly.
We’re here to help you avoid this situation from happening.
Scroll down to understand what revenue expenditure is and learn the key differences between revenue expenditure and capital expenditure.
Definition of revenue expenditure
Revenue expenditures are short-term expenses incurred that are significant for generating revenue within the same accounting period. It also usually refers to costs associated with existing fixed assets, which are spent to merely maintain the assets in their working condition without adding any additional value.
Typical examples of revenue expenditure are repair and regular maintenance costs. Those expenses are necessary to keep your machines or equipment operating well. At the same time, they don’t substantially improve or extend the assets’ useful life for future financial benefits.
Types of revenue expenditure
There are two main categories of revenue expenditure:
Expenses for maintaining revenue-generating assets (e.g., cleaning, repairs, and maintenance costs)
Expenses for running the day-to-day business (e.g., wages paid to factory workers, utility expenses, rent, and office supplies)
Key differences between revenue expenditure and capital expenditure
First of all, what is capital expenditure?
Capital expenditure is the amount spent to acquire or considerably upgrade the capacity or capabilities of long-term assets like equipment, machines, or buildings.
The key difference between the two is time scale, whereby revenue expenditures simply keep the business going on a day-to-day basis while capital expenditures invest in the longer-term growth of the business.
To help you easily see the main differences between revenue expenditure and capital expenditure, we’ve created a table to summarize below:
Operate day-to-day business
Acquire long-term assets
Maintain long-term assets in working condition—add no extra values
Improve long-term assets—add extra value
Provide benefits only for the accounting period
Provide benefits for more than an accounting period
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Being in business is all about making a profit. But profit isn’t only about your sales numbers. Effectively controlling and minimizing expenses is just as important as boosting 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 businesses is the expense report.
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 able to make the most of it and improve your business’s productivity and internal control.
What is an expense report?
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.
Small businesses sometimes require employees to pay for work-related expenses such as transportation out of their own pocket, which will later be reimbursed by the business owner. This process is documented in an expense report with 3 simple steps:
The employee lists all the business-related spending such as transportation-related costs, accommodation, or meals in an expense report. Receipts should be attached to the document.
The employer checks the expense report for accuracy and validity.
The requested amount is paid back to the employee.
Sometimes, the process can be reversed in which the companies make advance payments to 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 their advances and have these transactions recorded in the bookkeeping system.
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, companies can examine their financial health, determine if they’re spending over or under budget, then analyze the causes and devise immediate solutions to improve expense management.
Shoeboxed expense report
Regardless of what type of business you run, filing a tax return can be a real headache. Businesses are always searching for ways to minimize their taxable amounts.
Many business expenses are deductible and 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.
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 kinds of expenses are 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 business.
An expense report may look different among small companies, depending on the nature of its 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 10 most common business tax expenses that you can deduct with brief explanations of what’s covered, what’s allowed, and what’s not.
You can fully deduct expenses related to promoting your business, including digital and print advertising, social media advertising, website design and 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.
You can write off office supplies including stationery, office cleaning service, drinks and 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 cost of materials used in the current year.
Home office expenses
If you’re a small business owner working from home, don’t miss out on this deduction! 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.
First and foremost, before you try to write off your travel expenses, ensure that the purpose of your trip. Here are 3 rules to help you determine 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 require you to sleep or rest prior to returning home.
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 but it was raised to 50% in 2020 due to the pandemic. However, this limitation does not apply 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.
Tax-deductible donations must meet certain criteria. For example, the receiving organization must be a qualified institution. Recognized institutions may include, but are not limited to, religious organizations, nonprofit educational agencies, museums, and local volunteer groups. There are different guidelines depending on the nature of your donations such as cash, food, and clothing.
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.
You can claim insurance premiums; and if 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 fees, or office rent payments. 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.
It’s also very common for businesses to make the mistake of writing 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.
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.
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.
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!
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.
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.
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!
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.