How to Do an Expense Report for Your Business

An expense report is a formal document detailing business-related expenditures incurred by an individual or organization over a specific period. Its primary purpose is to enable employees to receive reimbursement for out-of-pocket costs spent on behalf of the company. These reports are also fundamental for businesses to track financial outflows, manage budgets, and maintain accurate records for tax compliance and audits.

Understanding Expense Report Fundamentals

Understanding the core components of an expense report is the first step in accurate financial tracking and reimbursement. Expense reports include expenditures considered “ordinary and necessary” for business operations, meaning they are common and helpful in a particular trade or business. Common reimbursable expenses often include travel costs like airfare, lodging, and car rentals, as well as business meals, office supplies, and professional development training.

Each entry on an expense report requires specific information to ensure it meets Internal Revenue Service (IRS) substantiation requirements and company policy. This includes the date the expense was incurred, the name of the vendor or merchant, the amount paid, and the method of payment used. A clear business purpose must be provided for each expense, explaining why the expenditure was necessary for business activity. The IRS requires adequate records to establish the amount, time, place, and business purpose of an expense.

For reimbursements to be non-taxable income for the employee and deductible for the business, they must fall under an “accountable plan” as defined by the IRS. An accountable plan requires that expenses have a business connection, are substantiated with adequate records within a reasonable timeframe, and any excess reimbursements are returned to the employer. If these criteria are not met, reimbursements may be considered taxable wages for the employee, subject to income and payroll taxes.

Collecting and Categorizing Expenses

Effective expense reporting begins with diligently collecting and organizing all supporting documentation. Receipts are primary evidence of an expense and are generally required by the IRS for any lodging expenditure and other expenses of $75 or more. Other supporting documents like invoices, canceled checks, or confirmation emails should also be retained to corroborate expenses.

Businesses and individuals employ various methods for managing these documents. Physical folders can work for paper receipts, but digital solutions offer greater efficiency and security. Scanning receipts and storing them digitally, or utilizing dedicated expense tracking applications that capture and organize images, helps maintain timely and accurate records. These digital tools can also facilitate categorization, an important step in preparing an expense report.

Categorizing expenses involves assigning each expenditure to a relevant business category, such as transportation, lodging, meals, or office supplies. This practice aligns with company accounting needs and helps streamline the reporting process. Consistent and accurate categorization also supports budgeting, financial analysis, and simplifies tax preparation by clearly identifying deductible expenses. Maintaining these records promptly, rather than waiting until the last minute, significantly reduces errors and ensures all eligible expenses are captured.

Assembling Your Expense Report

Once all expenses have been collected and organized, the next step involves compiling them into a formal expense report. Many businesses provide specific forms or templates, which can range from paper documents to sophisticated online platforms or specialized software. Spreadsheets, such as those in Excel or Google Sheets, are also commonly used, especially by smaller entities, due to their flexibility.

The process requires entering each expense item into the chosen format, ensuring all necessary fields are accurately populated. Each entry should be a separate line item, allowing for detailed tracking and review. For each expense, supporting documentation, such as a scanned receipt or invoice, must be attached or digitally linked. This linkage provides the necessary proof for auditors and ensures compliance with record-keeping requirements.

Before finalizing the report, a thorough review for accuracy and completeness is important. This includes verifying that all expenses are listed, totals are correct, and every entry has corresponding documentation and a clear business purpose. This careful review helps prevent delays in reimbursement and ensures the report adheres to company policies and tax regulations.

Submitting and Following Up

After assembling the expense report, the final stage involves submission and follow-up. Submission methods vary by organization and may include uploading the report through an online portal, emailing it to a designated department, or submitting a physical copy. Adhering to established submission deadlines is important, as many companies require reports within a specific timeframe, typically 30 to 60 days from when the expense was incurred or a trip concluded.

Upon submission, the report usually enters an approval workflow, often reviewed by a manager and then the finance department. During this process, queries for clarification or additional information may arise. Addressing these promptly helps expedite the reimbursement. Reimbursement timelines can vary but typically occur within one to two pay cycles after approval.

It is advisable to retain copies of all submitted expense reports and supporting documentation for personal records, even after reimbursement. This practice provides a personal audit trail and can be useful for future reference or in case of any discrepancies.