Guide to reimbursable expenses for small businesses

Sometimes employees need to spend their own money on business-related purchases, whether for office expenses or something else. If they serve legitimate business purposes, these types of charges are known as reimbursable expenses and are subject to repayment by the company. 

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Some examples of reimbursable expenses are:

• Travel expenses
• Phone and internet expenses
• Membership fees for professional organizations
• Training and education

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In this article, we’ll take a deep dive into reimbursable expenses, how they function in accounting and an overall general expense management program, distinguish them from non-reimbursable expenses, and show you how to effectively manage expense reports and reimbursements.

What are reimbursable expenses?

Reimbursable expenses are costs that an employee initially bears for the company, anticipating later reimbursement from the organization. Such a system exists because employees sometimes need to acquire items or services for their roles quickly, and it's often more practical for them to make these purchases directly instead of navigating prolonged procurement channels.

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When considering reimbursable expenses for your small business, it's important to have a clear expense policy in place to avoid confusion and potential disputes between your team members and your company.

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Why do reimbursable expenses matter?

Reimbursable expenses matter in business for several reasons:

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• Enhancing operational speed: One of the primary benefits of reimbursable expenses is that they allow employees to act quickly. Whether it's procuring essential tools, reserving a venue for discussions, or embarking on a business trip, employees can take quick steps without extensive company permissions or protocols.
• Precise documentation: Financially, when companies compensate employees for business-related expenses, it guarantees that all related costs are meticulously logged in the organization's financial records. This is vital for gauging the company's fiscal stability and setting out budgets.
• Building employee confidence: When companies consistently pay employees back for expenses, it builds a sense of trust. Employees feel valued and are more likely to take initiative in their roles, knowing they won't be left footing a hefty credit card bill for out-of-pocket business expenses.

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In sum, reimbursable expenses combine operational efficiency with fiscal responsibility and employee welfare, creating a balanced ecosystem. Thus, enterprises need to manage these outlays smoothly.

Examples of reimbursable expenses

Reimbursable expenses can range from business trips to more nuanced expenses like membership fees for professional associations or training sessions to enhance skill sets.

What is an example of a reimbursable expense?

A classic example would be travel expenses. Imagine an employee is participating in a business seminar. They arrange their air travel, secure lodging, and perhaps dine out several times during the event. After concluding their trip, they report the accumulated expenses, and the organization compensates them for these expenditures.

More examples of common reimbursable expenses:

• Travel costs: Business travel expenses like flights, accommodation charges, dining costs, and ground transport. These arise when an employee goes on a trip primarily for business purposes. Sometimes, companies give employees a per diem instead.
• Meals and entertainment: When an employee dines with a client or conducts a business conversation during a meal, these expenses are considered eligible for reimbursement.
• Membership fees: Many professions have associated organizations or bodies. If an employee's membership in such a group benefits their role or the company at large, the associated fees can be considered for reimbursement.
• Phone and internet expenses: With the rise of remote work, employees using their personal phones or home internet for work tasks isn’t uncommon. These utility expenses, when exclusively used for work, can sometimes be reimbursed.
• Training and education: When employees enroll in courses, attend workshops, or participate in conferences that bolster their professional skills, these expenses might be reimbursable.

What is considered reimbursable?

Companies typically have an expense reimbursement policy in place that determines their list of reimbursable expenses. These policies lay out clear guidelines around what makes an expense reimbursable, including:

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• Essential for business activities: Reimbursable expenses should have a clear connection to an employee's role or be vital for the regular functioning of the company
• Within set boundaries: Businesses often set spend limits for reimbursements, especially for particular outlays like dining or accommodation expenses
• Proper documentation: Usually, employees must provide valid receipts or proof of purchase to support their expense reimbursement claims
• Within budget allocations: Some companies may allocate a certain budget for reimbursable expenses within a given period. In such cases, employees must ensure their claims don’t exceed this allocated budget.

What is a cost-reimbursable expense?

A cost-reimbursable expense refers to a reimbursement method where the amount refunded to the employee directly reflects the actual expenses they've incurred. In this setup, the company repays the precise sum the employee has spent on work-related tasks rather than a fixed or estimated amount.

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What's the difference between reimbursable and non-reimbursable expenses?

Reimbursable expenses are primarily those directly linked to business purposes. On the other hand, non-reimbursable expenses aren't directly linked to the primary activities of a company.

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To start, let's look at some common types of reimbursable expenses for small businesses:

Reimbursable expenses

• Company car repairs
• Business conference airfare
• Meals during client meetings
• Necessary office equipment
• Membership fees for trade unions or professional organizations

Non-reimbursable expenses

By contrast, these types of expenses tend to be considered non-reimbursable by companies both large and small:

• Rental car upgrades
• Personal vacation flights
• Extravagant personal dining
• Personal entertainment gadgets
• Personal gym membership

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Health insurance isn’t typically treated as a reimbursable expense, but rather a direct benefit provided to employees. Companies typically pay premiums directly to health insurance providers as part of their benefits package rather than reimbursing employees for purchasing their health insurance. The employee is usually responsible for any medical expenses above and beyond this.

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Are reimbursements taxable income?

Generally, properly accounted reimbursements are not considered taxable income for the recipient. When a company provides reimbursement to an employee for a legitimate business cost, this compensation is generally not considered part of the employee's taxable earnings, provided there's an organized protocol in place and the employee submits the necessary proof or records in a timely fashion. However, it's always advisable to consult with a tax specialist or check IRS guidelines pertinent to your region.

How do you account for reimbursable expenses?

Reimbursable expenses are recorded on an income statement by debiting the specific expense account (like travel expenses or office supplies) and crediting cash or accounts payable.

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Properly accounting for expenses is important for ensuring you can claim tax deductions for your deductible expenses. To do so, you’ll need to follow an accountable plan as laid out by the IRS. You can read about how to reimburse employees for tax purposes in our guide on taxable employee expense reimbursements.

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In a nutshell, the accounting process for reimbursable expenses looks something like this:

• Upon receiving an expense claim from an employee, the finance team reviews the submitted costs, checking for compliance with company guidelines
• Once verified, the accountant will record the expense, increasing the expense category and recognizing a payable to the employee
• When the reimbursement is paid to the employee, the payable is cleared

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By following this method, businesses ensure that all expenses, even those initially paid by employees, are accurately reflected in the company's financial statements.

Managing reimbursements with Ramp

Managing reimbursements can be time-consuming, especially with a large workforce. Fortunately, Ramp’s expense reimbursement software can streamline this process.

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Here are some of Ramp’s features that you can use to handle your employee business expenses:

• Versatile reimbursement options: Ramp offers flexibility in how reimbursements are processed. For businesses that prefer direct bank transfers to an employee’s bank account, Ramp provides an ACH option. 
• Automated mileage calculations: If you reimburse employees for the use of their personal vehicle, accurate mileage rate calculations are essential. Ramp's integration with Google Maps makes it a breeze. When an employee logs a start and an endpoint, the system determines the most efficient route and calculates the reimbursement based on the company's set rate per mile.
• Customizable submission and approval protocols: Ramp allows a tailored approach to both expense submission and approval. Companies can set guidelines on what details employees need to provide during reimbursement submission. Similarly, there's flexibility in setting up approval hierarchies based on the amount being claimed.