Inefficient T&E reimbursement policies can create complex business problems

When it comes to business inefficiencies, travel expense reimbursement policies often rank close to the top of the list. They’re also 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 modifying a travel expense reimbursement policy is hard. They need to understand the value of the changes before they’ll address the issue.

Small business owners should read this carefully, particularly if your business is dependent upon in-person sales presentations or trade show participation. Here's a page on t&e for sales teams for more information. Many companies are set in their ways when it comes to their travel policy and handling travel costs. Adopting new techniques and more efficient technology can be a hard sell.

In this article, we’re going to talk about travel-related expenses, reimbursement, expense reports, travel authorizations, business expense categories, legal guidelines, and how to make all that work together. We’ll also offer some solutions like automation and expense management software. This is not a simple topic, so grab a cup of coffee and settle in. There’s a lot to cover.

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What is travel expense reimbursement?

Traveling for business purposes costs money. Someone needs to pay for airfare, hotel rooms, rental cars, rideshare, meals, client entertainment, and other travel arrangements. Travel expense reimbursement is the process used to pay back the party who covers those incidental expenses while on the road.

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.

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.

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. 

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.

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How do travel expense reports work?

Let’s briefly walk through a typical business trip with an employee working on a domestic or international travel expense reimbursement system. Assume the company booked and paid for the air travel, and other transportation costs, so that’s taken care of. 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.

The next step is to check in to the hotel. Like the rental car agency, hotels don’t provide a final bill with itemized charges until the guest checks out. In the meantime, the employee, who has a per diem limit, needs to keep track of their own expenses. They must use a credit card for those because cash receipts aren’t acceptable proof of an expense.

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.

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. Lose a receipt and the expense is invalid. Now you’re paying for business travel with personal money.

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.

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Processing expense reports for travel reimbursements

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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. 

We spoke about inefficiencies above. 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. This is known as T&E management. Without automation, it can be extremely inefficient. Humans, no matter how smart they are, can make mistakes.

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. Studies have revealed that most companies have challenges in at least one of these areas. 

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What are common travel expenses?

We’ll get into the legal and tax implications in another section. 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.  

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.   

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.

Rental cars

Rental cars aren’t always necessary. When they are, the expense should be reimbursable. To keep costs down in this category, 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. On that note…

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 ride share companies charge based on time and miles driven, a mileage reimbursement might be variable.

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. 

Meals

We all need to eat. There are several ways of handling this 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. 

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.

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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. 

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 co-pay.

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Legal expectations for travel reimbursement

Regardless of what the internal expense policy states, the Internal Revenue Service (IRS) has determined that certain expenses can be deducted by the business and others cannot. 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.

Before we get into the tax and legal implications of expense reimbursement, it would be remiss of us not to mention that expense automation can make sorting this out much simpler. We’re getting to the point where we start talking about solutions, so don’t stop reading just yet. Let’s examine tax write-offs and legal issues before moving on.   

Tax write-offs

We can’t stress enough how important it is to have a professional accountant handle your taxes. The IRS changes its tax code frequently, so what you can write off on taxes and how much is allowed may not be the same as it was in past years. This is particularly true when a new president comes into office. You can expect the tax laws to change when that happens.

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: We covered this briefly in the section above. 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

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Keeping track of all this is complicated. A business can spend countless hours managing it or they can automate the process with expense management software. The best-case scenario for this is to find a platform that connects seamlessly with your accounting software. We’ll get into that in more detail below.

What 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.

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. 

Have we mentioned that automation can help you better manage this process? Your job as a small business owner will be much easier if you’re able to auto-categorize expenses, track them in real time, import data from your accounting software, and integrate state laws into your expense policy. Expense management software streamlines all that for you.   

Travel expense reimbursement challenges and solutions

We’ve covered a lot in this article, so we’re going to summarize it here by highlighting the challenges of travel expense reimbursement and potential solutions for them. 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.  

Challenges

Just to clarify, we’re going to go through some challenges that companies face when using expense reimbursement systems without automation. Many of these can be overcome with new technology, but some of them are inherent with reimbursement in general. 

• Expense tracking: With a traditional reimbursement system, the amount of actual expenses isn’t known until expense reports are submitted by employees. This is challenging for small businesses trying to operate on a budget and unavoidable when traveling employees are in control of spending while on the road

• Cost control: Cost control is reliant on policy and employees following that policy when they travel. Reimbursement comes after the fact and can be denied if it doesn’t adhere to the company expense policy, but the company is then opening itself up to potential legal issues, as explained in the previous section

• Cash purchases: Paying in cash is always a problem when you’re running a business. Without a canceled check or credit card receipt, the IRS may disqualify the expense if they do an audit. The company would be obligated to pay taxes on those disqualified expenses and possibly incur penalties and fees for trying to claim them

• Non-business expenses: Some expenses, even when traveling, are personal, not business. That includes certain food purchase, personal items, and non-business travel such as sight-seeing. If employees don’t know this, they may put those charges on an expense report, making the company liable for non-deductible expenses

• Fraud: The previous item on this list describes erroneous entries on an expense report. There are times when employees may try to slip something by intentionally. With no effective cost controls or real-time expense tracking, that’s easy to miss. Fraudulent entries can easily look legitimate if presented in a certain way

• Legal requirements: Running afoul of your state’s reimbursement laws could result in fines and bad public relations. Even with automation, it’s still up to the company to research local guidelines and adhere to them. It’s a good idea to look at pending legislation also when you do this, so you know what’s coming 

• Deductibility: Finding out after the fact that an expense is not tax-deductible cannot be rectified. You’re stuck with having reimbursed out of the company coffers without any hope of writing that expense off. Tax laws change frequently. Your accounting software keeps track of that. Is it connected to your expense management software? 

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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. Others can be implemented by adding new technology to your software suite. Here’s what we recommend:

• 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

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• Modify your expense and reimbursement policy: Too much spending freedom and minimal cozy controls make an expense and reimbursement policy inefficient

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• Make a list of deductible expense categories: Use IRS rules or ask your account which expenses are deductible and which are not

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• 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

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• Implement real time expense tracking and cost controls: Real time expense tracking makes it easier to make timely changes and control spending

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• 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, the issuance of 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. 

How to optimize travel expense reimbursement

As you may have already guessed, our number one suggestion to overcome expense reimbursement challenges is to automate your system. With Ramp, you can issue charge cards to employees for business expenses, track business expenses in real time, auto-categorize expenses, store PDF receipts, and import data from your accounting software

This system eliminates the need for manual expense reports. Your employees won’t need to track expenses while traveling because the company can track them remotely in real time. With an accounting application like QuickBooks or NetSuite, deductibility will never be a question.

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If you're currently searching for a managed travel solution to help you streamline your travel from top-to-bottom, Ramp for Travel is sure to help. Merging travel expense management with our all-in-one finance automation solution, Ramp for Travel can help you finally get your business travel and expenses under control.

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Learn more today.