What Are Reimbursable Expenses & How Do They Work?

Reimbursable expenses are costs an employee incurs on behalf of their employer during business activities. Instead of the company directly paying, the employee uses their own funds and is later repaid. This practice is a common part of operations for many businesses, allowing employees to perform their duties efficiently without being financially burdened.

Common Categories of Reimbursable Expenses

Businesses frequently reimburse employees for a variety of common expenses. Travel expenses often include airfare, train tickets, lodging, and local transportation such as taxis or ride-shares. When employees use a personal car for business, mileage reimbursement is typical, often based on IRS standard mileage rates which cover fuel, maintenance, and depreciation.

Meal and entertainment expenses are another common category, particularly for business meals with clients or colleagues. Some companies may use per diem allowances, which are fixed daily amounts for meals and incidental expenses, simplifying tracking. Office supplies and equipment purchased for work-related use, such as stationery, software licenses, or small office tools, are also frequently reimbursed.

Professional development costs, including fees for courses, conference registrations, certifications, and professional memberships that directly relate to an employee’s job function, are often covered. Client entertainment expenses are reimbursed to foster business relationships.

Company Policies and Guidelines

While common categories of reimbursable expenses exist, the specific rules governing reimbursement are established by individual companies and can differ significantly. Employees should consult their employer’s specific expense policy, often found in an employee handbook or internal guidelines, to understand what is covered. These documents detail the procedures and requirements for submitting expenses.

Many companies require pre-approval for certain expenditures, especially for larger purchases, specific types of travel, or conference attendance, to ensure they align with budget and business needs. Spending limits are also common, with companies setting maximum allowances for categories like daily meal expenses or hotel rates per night. Adhering to these limits is crucial for successful reimbursement.

Retaining original or digital receipts is a consistent requirement across most organizations. Receipts must include the date, vendor name, amount, and an itemized list if applicable. Companies also enforce specific timeframes for submitting expenses, often requiring submission within 30 to 60 days of the expense being incurred. Some items are generally not reimbursed, such as personal items, non-business related entertainment, or personal care services during travel.

Preparing for Expense Reimbursement

Accurate preparation is essential before submitting an expense report to ensure timely reimbursement. Employees must gather specific information for each expense, including the exact date of the expenditure, the vendor’s name, and the precise amount spent. A clear business purpose must be documented for every expense, and for meals or entertainment, the names of attendees and their business relationship are often required.

Relevant project or department codes might also need to be associated with each expense. Required documentation includes itemized receipts, invoices, or proof of payment. For travel, this could extend to travel itineraries, and for professional development, conference agendas or course registration confirmations.

Organizing these documents is important; best practices include arranging them chronologically or scanning physical receipts into digital files. Many companies utilize expense tracking applications that allow employees to capture images of receipts and input details immediately. Completing the company’s designated expense report form or entering data into an online system involves populating all required fields with the gathered information. All attached documentation must be referenced or linked within the report to support the claimed expenses.

Submitting Expenses for Reimbursement

After information is gathered and the expense report prepared, the next step is formal submission. Common methods include online expense management systems, such as Concur or Expensify, which provide a streamlined digital workflow. Alternatively, some companies may still require physical forms to be submitted to a specific department, like Accounts Payable, or allow email submission of scanned documents.

For online systems, the final steps involve reviewing a summary of the expenses, applying a digital signature, and clicking a “submit” button. For physical submissions, the prepared package of forms and documentation is delivered to the designated internal contact. Once submitted, the expense report usually enters an internal approval workflow.

This workflow often begins with manager approval, followed by review from a departmental head and a final audit by the finance department. Employees can expect to receive reimbursement within a few business days to a couple of weeks after the report has been fully approved. Reimbursements are commonly paid via direct deposit to a bank account or through a company check.

Tax Treatment of Reimbursements

The tax treatment of expense reimbursements varies depending on whether the employer’s plan meets specific Internal Revenue Service (IRS) requirements. Reimbursements made under an “accountable plan” are generally not considered taxable income to the employee. An accountable plan must meet three IRS criteria under Internal Revenue Code Section 62(c): the expenses must have a business connection, employees must substantiate the expenses with adequate documentation within a reasonable timeframe (e.g., 60 days), and any excess reimbursement must be returned to the employer within a reasonable period (e.g., 120 days).

When these conditions are met, the reimbursed amounts are excluded from the employee’s gross income and are not reported as wages on their Form W-2. For the employer, these reimbursements are deductible as ordinary and necessary business expenses. If a reimbursement arrangement does not meet the criteria of an accountable plan, it is considered a “non-accountable plan,” and the reimbursements are treated as taxable wages to the employee. These amounts would then be subject to income tax withholding and payroll taxes, and would be included on the employee’s Form W-2.

The Tax Cuts and Jobs Act (TCJA) suspended the deduction for unreimbursed business expenses for tax years 2018 through 2025. This means that for most employees during this period, unreimbursed job-related expenses cannot be claimed as a federal deduction. This makes it important for employers to operate under an accountable plan and for employees to seek reimbursement for all eligible business costs. While some state tax laws or specific professions might still allow for such deductions, the federal landscape has significantly changed.