Travel expense reimbursement 101: Everything you need to know

When it comes to business inefficiencies, travel expense reimbursement policies rank close to the top of the list. They’re also among the least likely to be addressed because executives and employees can be reluctant to make the sacrifices necessary to revamp them. It’s time-consuming, and adhering to travel and expense best practices can be hard. 

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However, revamping travel expense reimbursement policies and procedures can be a crucial optimization for any business. In this article, we’ll cover all things travel expense-related (expense reports, business expense categories, legal guidelines), before detailing strategies and technologies that can drastically improve your company’s travel expense reimbursement process.‍ Read on to learn the ins and outs of travel expense reimbursement. 

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 purposes. These charges can include airfare, hotel rooms, rental cars, rideshare, meals, client entertainment, and other travel arrangements. 

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Why doesn’t the company simply pay for it all upfront? That’s nearly impossible to do. The company can book and pay for airfare, but other travel expenses are variable, and many of them are incurred during the trip. To account for this, many businesses use traditional expense management software where employees use their own credit card and submit for reimbursement when the trip is over.

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This is where some of the flaws in the system are revealed. T&E costs are difficult to control when spending is left in the hands of the employee and only realized weeks afterward. Assigning a travel budget, particularly for meals, and allocating a per diem amount for spending can help keep costs down somewhat, but that still requires reimbursement with receipts the employee needs to organize. That is not their primary focus while on a business trip, so original receipts are often mismanaged.

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

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The inefficiencies in a traditional travel reimbursement program can lead to higher costs, increased employee turnover, and potential tax problems if things like travel expenses, lodging expenses, and entertainment expenses are not categorized correctly. Much of this can be avoided by using real-time expense management software. Continue reading below if you’d like to learn more about that.

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

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All that happens in the first few hours after a traveling employee gets off the plane. For expense reimbursement on that car and hotel room, they’ll need to collect the final bills on both and submit them as part of an 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 inherent in 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 a receipt to back that entry 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.

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Let’s assume that 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. This needs to get done for every expense report, so it requires time and resources. 

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We covered travel expense inefficiencies above, and manually checking expense reports falls in that category. 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. Humans, no matter how smart they are, can make mistakes.

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

9 common travel expenses

For now, let’s examine what types of expenses could be on an expense report submitted for reimbursement. Some of these may fall into the same category for expense audit purposes, but we’ve intentionally made the list more granular to help you better understand what and why these should be reimbursed.  

1. Per diem

Per diem is a Latin phrase that means “by the day.” Businesses use this 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 daily expenses, up to an approved amount. Most 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 air miles. An employee booking their own airfare doesn’t want to use their miles to pay for it, but they may earn miles for the booking. They save those for personal travel. That’s legal, though not necessarily ethical. Many companies have eliminated that problem by paying for the airfare at a company level, prior to the trip. If an employee wants to upgrade to first class, they will generally need to pay the difference out of pocket.

3. Rental cars

Rental cars are generally regarded as a reimbursable employee travel expenses. 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 need to pay the difference out of pocket. They could also opt for rideshare to be more cost efficient. 

4. Rideshare

The rise of Uber and Lyft has created new transportation options for business travelers. They’re particularly useful for trade shows and conferences where the employee is only commuting from the airport to the hotel or conference center and back. In congested urban areas, like New York and Los Angeles, rideshare is often a more efficient option than a rental car. Since rideshare companies charge based on time and miles driven, a mileage reimbursement might be variable.

5. 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. 

6. Meals

There are several ways of handling 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. 

7. Client entertainment

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

8. Business supplies and equipment

Business supplies and equipment could include an external monitor for presentations, some pens for clients to fill out forms, clipboards, 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. 

9. 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.

Legal expectations for travel expense reimbursement

Regardless of what the internal expense policy states, the Internal Revenue Service (IRS) has determined what are and are not eligible travel expense deductions. There are also legal precedents in some states that require a company to reimburse its employees for business-related expenses. The job of the expense auditor is to know about both.

Tax write-offs for travel expenses

The company expense policy should allow reimbursement only for expenses that the company can then write off as a business expense on their taxes. There are several of these, and each expense deducted will need a receipt attached to it 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 city or area that you normally conduct business, 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% deductible. Be careful in this category. It’s the one that IRS auditors look most closely at.

• Auto expenses: This category is most often used for business use of a personal vehicle. Businesses can also deduct rental cars here, not in the “travel expense” category.

• 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, in the 2014 case of Cochran v. Schwan’s Home Service, Inc, the court ruled that employees forced to use their personal cell phones for business purposes are entitled to reimbursement from their company.

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This is important. Setting up an expense reimbursement policy without knowing the legal requirements in your state could lead to fines and financial unmanageability. Small business owners often believe that 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 solutions

We’ve covered a lot in this article, so we’re going to summarize it here by highlighting the challenges—and solutions—for travel expense reimbursement. In the final section, we’ll go over some of the best ways to optimize your travel reimbursement program and offer some suggestions for tools that can help you with that.  

6 travel expense reimbursement solutions

There are certain steps that you can take to overcome the challenges listed above. Some of these will require some manual labor on your part, while others can be implemented by adding new technology to your software suite. Here’s what we recommend to best manage your travel and expense policies:

1. Research reimbursement laws in your state: Your reimbursement policy may not be in line with what your state requires you to reimburse—check local laws to verify this.
2. Modify 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 account which expenses are deductible, and which are not.
4. Eliminate cash purchases entirely: Cash purchases should be taken off the table entirely. The IRS might deny them as deductions and there’s too much room for fraud.
5. Implement real time expense tracking and cost controls: Real time expense tracking makes it easier to make timely changes 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.

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

Streamline travel expense reimbursement with Ramp

Managing travel expenses can be time-consuming and complicated no matter how big or capable your accounting team. Fortunately, technology is here to help: Ramp’s modern expense management system performs the most time-consuming parts of the process for you with automation and real-time tracking. 

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Ramp’s innovative spend management platform automatically classifies, organizes, and reports on your company’s travel expense spending—including receipts—so you can stay agile with your finances. Plus, Ramp gives you one-of-a-kind travel features that allow you to create travel spending policies in seconds. 

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The centerpiece of Ramp’s technology is our corporate charge card, which serves as the ideal solution for company-wide business travel. You can issue Ramp charge cards to your team and set spending limits on flights, hotels, and per diems, bypassing the often painful process of reimbursements.