Travel expense reimbursement: A guide for businesses

Business travel can be exciting for employees, but the travel expense reimbursement process can be a headache if you don’t have the right procedures in place. An efficient travel reimbursement process ensures that employees aren't financially burdened by work-related travel and can focus on their duties.

In this article, we’ll cover all things travel expense-related—expense reports, business expense categories, and legal guidelines. Then, we’ll share tools and strategies that can help improve your company’s travel expense reimbursement process.

What is travel expense reimbursement?

Travel expense reimbursement is the process by which companies pay back their employees for the charges they incur while traveling for business. These charges can include airfare, hotel rooms, rental cars, rideshares, meals, client entertainment, and other travel arrangements.

Why doesn’t the company simply pay for it all upfront? That’s nearly impossible—the company can book and pay for airfare, but other travel expenses are variable, and many of them are incurred during the trip.

As a result, many businesses use traditional expense management software that requires employees to use their own funds for purchases and submit their expenses for reimbursement when the trip is over. This is where some of the flaws in the system are revealed.

The challenges of travel expense reimbursement

Travel and expense (T&E) costs are difficult to control when spending is left in the hands of employees and only realized weeks later. Assigning a travel budget and allocating a per diem for meals can help keep costs down, but that still requires reimbursement—and receipts the employee needs to organize. That isn’t their primary focus while on a business trip, so original receipts are often mismanaged.

Travel expense reimbursement generally happens on a monthly or quarterly basis, creating another potential problem: business travelers must pay their credit card balances on time to maintain the bandwidth to travel again. If the bill comes due before the reimbursement is processed, they’re under pressure to cover it out of pocket.

The inefficiencies in a traditional travel reimbursement process can lead to higher costs, increased employee turnover, and potential tax problems if costs like travel expenses, lodging expenses, and entertainment expenses aren’t categorized correctly. Much of this can be avoided by using real-time expense management software—more on that below.

How do travel expense reports work?

Let’s walk through a typical business trip to show how travel expense reports work.

Assume a company booked and paid for the airfare, car rental, and other transportation costs for one of its employees. When the employee lands, they go to the rent-a-car company, swipe their credit card, and drive away with a car. The final receipt comes when they return the car. Ditto with the hotel—the employee puts down a credit card when they check in, but they won’t see a final bill with itemized charges until they check out.

All that happens in the first few hours after a traveling employee gets off the plane. For employee expense reimbursements on that car and hotel room, they’ll need to collect the final bills on both and submit them in their expense report. They’ll also need receipts for any itemized activity on the hotel bill and possibly a mileage rate report from the car rental agency.

The problem with expense reports

Are you starting to see the problems with this system? When the employee is the primary payer of travel costs during a business trip, the company is counting on them to be organized enough to list every expense on an expense report and provide proof of purchase receipts to back those entries up. If they lose a receipt, the expense can’t be submitted and reimbursed. Now the employee is paying for business travel with personal money.

Let’s assume the employee does everything right and submits a thorough, organized expense report for reimbursement. That reimbursement request then needs to go through an approval process that could take some time. The actual reimbursement will come in a few weeks or months after that, depending on the company’s reimbursement policy.

Processing expense reports for travel reimbursements

The employee experience with expense reports is only one side of the equation. Their job is to make sure their expense report is accurate and well-organized. The company’s responsibility is to double-check that against the business travel expense and reimbursement policy—for every single expense report. That takes time and resources.

This manual review of expense reports is another inefficiency in the expense approval process. It’s meant to be a system of checks and balances to ensure accuracy and adherence to company policy, otherwise known as T&E management. Without automation, it can be extremely inefficient. And humans, no matter how experienced they are, can make mistakes.‍

In the next few sections, we’ll go over the areas where mistakes are most prevalent. They include travel expense categories, tax implications, and the challenges of manual reviews.

10 common travel expenses

For now, let’s look at what types of employee travel expenses might show up on an expense report. Some of these may fall into the same business expense category, but we’ve intentionally made the list more granular to help you better understand what they are and why they should be reimbursed.

1. Per diem

Per diem is a Latin phrase that means “by the day.” Businesses use per diem allowances as a cost control measure for employees going on multi-day trips. The employee is allowed to submit a flat-rate line item on their expense report that includes all their out-of-pocket expenses—incidental expenses and otherwise—up to an approved amount. Most travel and expense reimbursement policies don’t allow meal expenses if they offer a per diem.

2. Plane tickets

This can be a tricky one because of credit card travel rewards. An employee booking their own airfare doesn’t want to use their airline miles to pay for it, but they may earn miles for the booking—which they save for personal travel. Many companies have eliminated that problem by paying for airfare at the company level before the trip. If employees want to upgrade to first class, they generally need to pay the difference out of pocket.

3. Rental cars

Rental cars are generally regarded as a reimbursable employee travel expense. To keep costs down, some reimbursement policies put a per diem rate on rental car fees. If the employee wants to upgrade and get a luxury sedan or SUV, they’ll have to pay the difference out of pocket. They could also opt for a rideshare or public transit to be more cost-efficient.

4. Rideshares

Apps like Uber and Lyft have created new transportation options for business travelers. They’re particularly useful for trade shows and conferences where employees are only commuting from the airport to the hotel or conference center and back. In congested urban areas like New York and Los Angeles, ridesharing is often a more efficient option than renting a car.

5. Mileage

If your employees use their personal vehicles for business travel, your travel and reimbursement policy should include a section on mileage reimbursement—whether you use the standard mileage rate or the actual expenses method. This is a common employee travel expense that’s often tricky to calculate, so it might require some special attention.

6. Lodging

Sending an employee off to another state or country without setting up lodging is a recipe for disaster. Hotels, motels, and lodges can be booked upfront on the company credit card or paid for by the employee and submitted on an expense report for reimbursement. Watch for those room service charges and movie rentals—they often slip through the review process.

7. Meals

There are several ways to handle meals from a travel reimbursement perspective. We already mentioned the per diem option. Another choice is to simply have the employee keep a receipt for the meal and submit it as a separate line item on the expense report. Gratuities may or may not be included, depending on company policy.

8. Client entertainment

This might be the most abused category of expenditures. Going out to a lavish dinner with some friendly competitors and mentioning who you work for does not constitute a meal you can include on an expense report. Taking a client out for a baseball game and closing the deal does. Expense auditors need to scrutinize expenses in this category carefully.

9. Business supplies and equipment

Business supplies and equipment could include a TV or monitor for presentations, pens and clipboards for clients to fill out forms, or signage for a trade show booth. This is a broad category that’s different for every business. If a traveling employee needs supplies or equipment to do their job, it’s normally a reimbursable expense.

10. Medical expenses

Medical expenses don’t come up often, but the company is responsible if an employee requires medical care while traveling for the company. This category is for urgent or emergency care that results from a business-related injury. Insurance will cover the procedure, but the company may be responsible for the copay.

IRS rules for travel expense reimbursement

Regardless of what your internal expense policy states, the Internal Revenue Service (IRS) has determined what constitutes eligible travel expense deductions. There are also legal precedents in some states that require companies to reimburse employees for business-related travel expenses. The job of the expense auditor is to know about both.

Tax write-offs for travel expenses

Your expense policy should allow reimbursement only for employee travel expenses that you can then write off as a deductible business expense on your taxes. There are several of these, and each expense deducted will need an associated receipt to protect your company in the event of an IRS audit. These are a few of the acceptable categories related to business travel:

• Travel expenses: This category includes airfare, tolls, taxes, and lodging. The IRS requires that the travel destination be away from the employee’s normal work location, and the trip must be longer than one business day.
• Business entertainment: The meal cost of a client dinner is only deductible up to 50%. Catering an office party or event can be 100% tax-deductible. Be careful in this category—it’s the one IRS auditors look most closely at.
• Auto expenses: This category is most often used for business use of a personal vehicle. Businesses should also deduct rental cars here, not in the travel expense category above.
• Office supplies: When office supplies are required for a business trip, the costs are deductible in this category.
• Office furniture: Buying or renting a folding table and chairs for a presentation while traveling counts in the office furniture category. Make sure your employees know this if they request authorization to make such a purchase.
• Advertising and marketing: This might not seem like an expense that an employee would submit, but business cards and signage count as deductible business expenses.
• Education: Sending an employee on a trip to take classes or attend an accredited seminar can produce multiple deductible expenses. Separate them carefully. The fees for the class go into the education category, not travel expenses.

Which travel expenses are you obligated to reimburse?

There have been several legal challenges over the years from employees who felt they were entitled to reimbursement for expenses. In California, the 2014 ruling in the case of Cochran v. Schwan’s Home Service, Inc., established that employees forced to use their personal cell phones for business purposes are entitled to reimbursement from their company.

This is important. Setting up a travel and expense reimbursement policy without knowing the legal requirements in your state could lead to fines. Small business owners often believe reimbursement is something they can determine on their own. That’s not the case. Before deciding what to approve or deny, check your state’s guidelines.

Travel expense reimbursement best practices

There are some best practices you can follow to overcome the challenges covered above. Some of these will require some manual effort on your part, while others can be implemented by adding new tools to your tech stack. Here’s what we recommend to manage your travel and expense policies effectively:

1. Research reimbursement laws in your state: Your reimbursement policy must align with state and municipal requirements. Check local laws to verify this.
2. Update your expense and reimbursement policy: Too much spending freedom and minimal cozy controls make an expense and reimbursement policy inefficient
3. Make a list of deductible expense categories: Use IRS rules or ask your accountant which business expenses are deductible and which are not
4. Eliminate cash purchases: Take cash purchases off the table entirely. The IRS might deny them as deductions, and there’s too much room for expense fraud.
5. Implement real-time expense tracking and spend controls: Real-time expense tracking makes it easier to quickly correct errors and control spending.
6. Issue corporate charge cards for employee travel: This puts spending and cost control in the hands of the company, not the employee. It will increase your bottom line.

The final item on this list, issuing corporate charge cards, solves several of the problems highlighted in this article. Corporate charge cards can have limits, and you can program cost control measures to kick in automatically if an employee tries to use the card for an unauthorized purchase. If you use Ramp’s corporate cards, you also get real-time expense tracking.

Streamline travel expense reimbursement with Ramp

Managing travel expense reimbursements can be time-consuming and complicated no matter how capable your accounting team is. Fortunately, Ramp’s modern finance platform automates the most time-consuming parts of the process for you.

Ramp combines travel booking, expense management, AP automation, and financial reporting, helping you control costs, improve efficiency, and simplify your tech stack with a single solution.

All you have to do is define your travel and reimbursement policies and Ramp Travel handles the rest, pulling compliant flight and hotel options into a single dashboard for employees to book. Once they’re on the road, our integrated expense management software collects data on every transaction for real-time expense tracking and automated expense reporting.

Travel expense reimbursement doesn’t have to be a headache. Try Ramp and see why customers save an average of 5% a year.