Small business owners understand what income and expenses are. But combine the two together into the concept of billable expense income and things become less clear.
Billable expense income is an important distinction for tax purposes. In layman’s terms, proper categorization of billable expense income could affect the small business tax deductions a company can take on their annual tax filing. In this article, we’ll expand on this concept and outline some best practices for tracking billable expense income.
What is billable expense income?
Billable expense income is revenue that is generated by purchases made on behalf of a third-party client or customer. A common example of this is the items that a caterer purchases to put on an event for your company. The caterer pays for the trays and burners, then itemizes those expenses on your invoice—that portion of the invoice is billable expense income.
Other examples of billable expenses include research and planning, online payment processing fees, tools for client engagement, materials costs, subscriptions and fees for service providers, and travel expenses. Let's dive into exactly why and how each of these is a billable expense.
Research and planning expenses
Offering your company’s services to a client is only the first step. Once the contract is signed, there may be a certain amount of research and planning required to fulfill your business obligations. Those both come with a cost, which includes time and labor. A best practice in this case is to itemize research and planning as a billable expense on your invoices.
An example of this is the research and meetings a freelance copywriter needs to do before they can start writing for a client. Many freelancers, since they’re independent and try to run lean, neglect the itemization and fail to classify research as a billable expense, opting instead to bulk it into a per-page or per-hour rate. However, this increases their tax liability. We’ll explain how below.
Digital payment processing fees
Digital payment platforms charge a fee to process payments—those fees qualify as billable expenses. Many small business owners make the mistake of only counting the portion they receive after the processing fee is deducted. The fee is a cost and should be treated as such. Accounting departments know this because invoices and accounts receivable won't match without including the fee.
The same situation applies if you incur fees when purchasing materials or supplies to properly service a client. An example of this would be buying additional hardware or software from an online vendor. The vendor may use a payment processor, like PayPal, that charges 2-3% for transactions. That portion of the payment should be listed as billable expense income.
Tools for client engagement
Let’s use a marketing firm as an example. When a new client is onboarded, marketing firms implement a client engagement system that could include instant messaging, reporting dashboards, and automated emails. The fee for those tools is a billable expense. The time spent setting them up and using them also falls within this category.
Sometimes, client engagement doesn’t necessarily require new technology. Even so, it's good practice to note the time spent on a phone call as a billable expense.
Client materials costs
This is where expense management for small businesses can get a bit tricky. Your company may have multiple clients that require the same materials. And in this instance, the natural tendency is to list them in bulk, creating a business expense category on one line in your GL. However, doing this can be a big mistake as costs incurred on behalf of a client should always be listed separately.
A good example of this is the mulch and topsoil used by landscapers. Multiple clients require those materials, so the natural inclination is to buy them in bulk, possibly at a discounted volume rate. You can do that if you like, but that savings needs to be passed on to the client. An auditor will catch the discrepancy if your billable expense is for the full price.
Subscriptions and fees for service providers
This category is simple. Invoices from service providers that are needed to complete a job can be passed on to the client. Examples of this are costs for advertising, licensing fees for intellectual property, and shipping costs. These should be itemized and included on the client invoice, then classified as a billable expense.
Like materials costs, subscription fees can be a bit tricky when it comes to client attribution. For best results, try to keep expenses for each client independent from one another. Any fees incurred on behalf of your entire company that just happen to benefit you in that client relationship, like an industry newsletter for instance, should be kept separate.
Getting on an airplane to fly to a client’s office is a billable expense. Add the cost of the trip to your invoice and include airfare, hotel, and Rent-a-Car, but not drinks at the bar. You’ll also want to avoid invoicing for a client dinner. If you choose to pay that tab, that’s a magnanimous action, not something to include on the client invoice.
Use a corporate card for travel expenses to eliminate any confusion over whether it’s business or personal. Using a personal credit card and reimbursing yourself from the company may be a red flag if you’re audited. The IRS has the right to deny travel charges, or any expense, that they deem to be personal and not a business expense.
Why billable expense income is important for tax deductions
Billable expense income is important when filing small business taxes. Neglecting to record it or mis-categorizing business expense income as general expenses can result in a higher tax liability for the company. Business expenses are generally 100% tax deductible. On the other hand, general expenses may be subject to limitations.
Travel expenses are a good example of this. If you travel frequently, but don’t attribute your travel expenses as a business expense for a specific client, the IRS may not allow you to deduct those travel expenses. Think of it as making sure there’s a paper trail. Record the airfare, rent-a-cars, and hotel charges as itemized expenses and include them on the client invoice.
Other business expense deductible categories include vehicle usage, advertising, and promotional costs. Business meals are deductible up to 50% if they’re not lavish and the business owner is present. The IRS offers additional guidance on this in their online Topic #511: Business Travel Expenses. It’s okay to attribute them to a client relationship. Invoicing the client for them is considered bad form, so be sure to write it off without charging them.
There are also indirect tax implications of not properly keeping track of business expenses. In 2018, the Trump administration added the “Qualified Business Income Deduction.” If the taxable income of a company is below $163,000, you may be eligible for a 20% tax deduction. Failing to record business expenses in the right category could cost you this deduction.
How to track billable expense income in QuickBooks
Tracking expenses is one area of your business where you don’t want to leave anything to chance. Keeping track of business expenses is a task best accomplished with an automated accounting system. If you use QuickBooks, you can turn on billable expenses by using the steps we’ve included below.
Once billable expenses are turned on in QuickBooks, you can then use the software to create bills and add billable expenses to invoices. To further automate the process and ensure accuracy in your record keeping, consider connecting QuickBooks to a spend management platform like Ramp.
Connect your accounting software with Ramp
Through our Quickbooks integration, Ramp can help you digitize your expense policy, auto-categorize expenses, support multiple entities as you scale your company, and automate reimbursements. With this integration, you can also split transactions, allocating business expenses by job, client, location, or project code.
Ramp also connects with a whole suite of popular accounting software such as Sage, NetSuite, Xero, and dozens of other via Universal CSV.
For further information on business expense income and other important accounting and financial management tasks for small business owners, visit our Resources section.