Expense Report and Reimbursement Best Practices

Several key policies can significantly reduce the risk of expense reimbursement fraud and improve your company's financial record keeping. Implementing these ideas before problems arise will save your business time—and money—in the long run.

What is an expense report?

Business owners often find it convenient to have employees pay for incidental expenses. This can include business meals, travel expenses, and small purchases of office supplies or equipment. Employees generally expect reimbursement for expenses they pay on behalf of their employer.

At a minimum, companies should require a form called an expense report for all employee reimbursements. Employees—and sometimes partners and shareholders—use this form to report expenses they pay for the business.

Expense report template

Details provided on the expense report include the date paid, vendor name, the amount paid, expense description, and totals for each expense category.

Some businesses use paper expense reports. However, expense reporting software can make completing and processing expense reports easier. This usually leads to more accurate information and a better experience for both employees and business owners.

Microsoft's free expense report template provides a good example of a basic electronic expense report. This template captures all information required without overwhelming the employee—it fits on a single page.

Expense report best practices

Requiring expense reports represents a great first step in ensuring accurate expense reimbursement. However, several other policies offer important benefits. Expense reimbursement best practices include:

• Written policy. Create a formal, written expense reimbursement policy. Disputes about expense reimbursement can get ugly without proper communication. Employees may become resentful if they don't receive the reimbursement they expect, while business owners often feel taken advantage of when employees submit unauthorized reimbursement requests. A written policy that explicitly states which expenses qualify for reimbursement—and how reimbursement will occur—can prevent such misunderstandings.
• Receipts. Require receipts along with the expense report. This makes expense reporting fraud much more difficult. Requiring receipts also ensures the company will have the required documentation to support its tax deductions.
• Accountable plan. Ensure your expense reimbursement policy meets the IRS rules for accountable plans. Nonaccountable plans create taxable income for the employee and payroll taxes for the business. Most expense reimbursements from an accountable plan do not cause these issues. Among other rules, accountable plans can only reimburse actual expenses that the employee substantiates—usually using an expense report and receipts. IRS Publication 463 provides detailed rules for accountable plans.
• Separate reimbursement. Keep expense reimbursement separate from regular wages. Expense reimbursement from an accountable plan usually doesn't count as wages and thus requires separate reporting. Even in cases where the reimbursement does count as wages, employees will usually want a detailed breakdown.
• Separation of duties. Make a specific person—sometimes but not always the owner—responsible for approving expense reimbursement. Don't allow this person to approve their own expense reimbursement. Ideally, someone else—such as an accountant—should periodically audit expense reimbursements for errors and fraud.
• Deadlines. Enforce a deadline for submitting expense reports. This helps ensure the business can claim any tax deduction for the expense. Also, large amounts of unknown outstanding expenses can make financial data less accurate—or even cause a cash flow problem if an employee suddenly requests reimbursement for an entire year or more of expenses. Most companies require monthly or quarterly expense reports. Employees appreciate knowing how soon they will receive reimbursement, so also establish a deadline for the business to reimburse properly completed expense reports.

Requiring expense reports to follow these best practices will help you maximize your company's tax deductions while reimbursing employees the correct amount. Expense reimbursement fraud can cost hundreds of thousands of dollars and require hundreds of hours to deal with. These simple policies make fraud significantly more difficult and less likely.