Over the years, expense reports have developed quite a dreaded name for themselves. Often associated with missing receipts and boxes of papers, expenses have the reputation of being the bane of business owners’ existence. However with proper planning, it doesn’t have to be as awful as we have it depicted in our heads. While expense reporting is something that business owners usually hear a lot about around tax season, it’s important to develop a plan for reporting expenses as early as possible. Become a better business with our top five tips for expense reporting:
Always use expense reporting software (not excel or paper-based reports).
Transitioning from paper-based reports to expense reporting software will help you avoid human error and later, headache. By using automated expense reporting software, you’ll be better equipped to handle any audits, and employees will appreciate faster reimbursement times. 56% of companies are currently using an automated expense reporting system and many have seen improved travel policy enforcement, lower processing costs, increased visibility, and improved employee satisfaction. Good software tools like Expensify, Tallie, and Xpenditure help automate the collection, reporting, and reimbursement of employees’ business and tax expenses. However, keep in mind there should always be an approval process by a manager which often requires manual/non-automated oversight. It’s hard to automate good judgement!
If you’re the business owner, don’t give your card to others to use.
Trust us on this one: employees should have their own unique business credit and debit cards. Not only will this cut-down on your stress level (no need to wonder where that card is anymore), but it will also help your business keep track of and control spending. Some credit card companies, like MasterCard, will even allow you to set limitations on spending and provide monitoring tools, too. Your accounting team will be able to see spending in real time and monitor cash flow all from one place. Another idea for keeping track of spending? Consider internal auditing for expense reports. According to Aberdeen Group, 88% of all best-in-class companies regularly audit expense reports compared to the industry average at 63%.
Employees should always document the “business purpose” for each expense reimbursement.
While trusting your employees is key to a successful company culture, employees should document why they are claiming a reimbursement as a tax expense. Whether they took clients out to lunch, or they booked business air travel, have your employees get in the habit of explaining the business purpose for every expense. This can be done with a simple code (more on that later) or more in depth reporting based on your company needs. Unfortunately, fraud does happen; illegitimate expenses make up around 14 percent of asset misappropriation fraud and cause a median loss of $30,000. To control reimbursements and expenses even more, consider establishing expense reporting budgets by individual or require employees to seek approval first before incurring a charge. Don’t forget to keep an eye on trends and key areas of spend; make sure certain areas aren’t dominating your spending, and if they are, determine if cutting back is needed.
Establish a coding system for your accounting records.
Good, automatic software can help you code your expenses that align to your accounting records (ie. parking, meals & entertainment, conferences, etc.) Creating a coding system, or using one within a software, will help make tax expenses clearer and more organized. One expense reporting tip that will make tax season easier is to have two meals and entertainment accounts. One for 50% deductible M&E and the other for 100% deductible M&E. Meals for large internal company events like holiday parties and summer company outings or coffee, drinks, and food provided within your office are 100% deductible. Almost all other meals are only 50% deductible for tax purposes. Keeping those expense reimbursements separate will make life a lot easier come tax time.
Submit timely expense reports.
If you let employees submit late expense reports, it often means you’re not understating the level of expenses in the current period. Timely reports help alleviate any miscalculations with cash flow, keeping your records up to date and current. Make sure employees are aware of reimbursement deadlines by publishing timelines for submitting expenses. Something to note: if your employees follow your established timeline, pay them as quickly as you can. For some employees, large business purchases are a stressful, financial burden. If you’re asking employees to respect your expense reporting timeline, you should respect their reimbursement one.
One of the best ways to stay on top of your tax expenses is to establish an expense reporting policy. Create guidelines for employees to clarify qualifying expenses that are expensable, and therefore deductible, versus expenses that are not. Include codes for each expense along with directions on how to report expenses in a timely manner. Encourage employees to keep track of their expenses beyond just keeping receipts, and ask them to submit timely reports. As travel and expenses become more and more a part of company norm, keep your eye on your policies and reevaluate them as needed. Once tax season rolls around, you’ll be able to give your bookkeeper everything they need to make filing a breeze.