What is a Reimbursable Expense? The Definitive Guide

A reimbursable expense is any legitimate business-related cost incurred by an employee, contractor, or other individual on behalf of a company, that the company then agrees to pay back to the individual. It’s essentially a repayment for out-of-pocket expenses. This is crucial for ensuring that individuals aren’t personally burdened by the financial responsibilities of conducting company business, and it requires a clear policy for defining what’s allowable and how to claim it.

Understanding the Nuances of Reimbursable Expenses

Reimbursable expenses aren’t just about paying people back; they’re about maintaining fairness, encouraging productivity, and ensuring legal and financial compliance. A well-defined reimbursement policy is essential. Without one, ambiguity breeds resentment, and the lines between personal and business expenses become dangerously blurred. This could lead to financial mismanagement and potentially even legal trouble with tax authorities.

Think of it this way: if a sales representative spends $100 on gas to visit a client, and that visit is crucial to closing a deal, it’s only right that the company covers that $100. This allows the rep to focus on selling, rather than worrying about personal finances. That’s the heart of a reimbursable expense: supporting business activities through fair financial practices.

Key Elements of a Reimbursable Expense Claim

The most basic reimbursable expenses include travel, meals, and client entertainment costs. However, many other elements may be included, but each expense claim usually needs the following:

• Original Receipt: This is crucial. A blurry photo or a handwritten note usually won’t cut it.
• Date of Expense: A clear record of when the expense occurred.
• Amount Paid: The exact cost of the expense.
• Purpose of Expense: A brief explanation of why the expense was necessary for business purposes. Who was the client and what was discussed?
• Approval (If Required): Many companies require pre-approval for certain expenses, especially larger ones.

Why a Robust Reimbursement Policy Matters

A good reimbursement policy is more than just a set of rules; it’s a shield against financial and legal risks. Here’s why it’s so important:

• Clarity and Transparency: Employees know exactly what’s covered and what’s not, reducing confusion and frustration.
• Fairness and Morale: Employees feel valued and supported, leading to increased job satisfaction and productivity.
• Cost Control: Clear guidelines prevent frivolous spending and ensure that expenses are reasonable and necessary.
• Legal Compliance: Adherence to tax laws and regulations minimizes the risk of audits and penalties.

Potential Pitfalls to Avoid

The realm of reimbursable expenses isn’t always smooth sailing. There are common pitfalls that businesses should be aware of:

• Vague Policies: A poorly written policy leaves room for interpretation and potential abuse.
• Lack of Enforcement: Even the best policy is useless if it’s not consistently enforced.
• Unreasonable Caps: Setting reimbursement limits that are too low can discourage employees from making necessary business trips or entertaining clients.
• Ignoring Tax Implications: Failing to understand the tax implications of reimbursements can lead to costly errors.
• Ignoring Remote Employees: Employees working remotely may incur different types of expenses such as internet, electricity or office equipment.

FAQs: Demystifying Reimbursable Expenses

1. What types of expenses are commonly reimbursable?

Common reimbursable expenses typically include travel expenses (mileage, flights, hotels), meals (when traveling or entertaining clients), client entertainment, office supplies, conference fees, and professional development costs (if approved). Policies should outline precise details for each of these items to eliminate misunderstandings.

2. What is the difference between a reimbursable expense and a per diem?

A reimbursable expense is for actual costs incurred, backed by receipts, while a per diem is a fixed daily allowance for specific expenses like meals and lodging. Reimbursable expenses require documentation of actual spending, whereas per diems are paid regardless of actual costs, simplifying administration but potentially leading to over or under compensation.

3. How do I submit a reimbursement request?

Most companies have a standardized process for submitting reimbursement requests. Typically, you’ll need to fill out an expense report, attach the original receipts, and submit it to your manager or the accounting department for approval. Some companies use expense management software for a streamlined process.

4. What happens if I lose my receipt?

Losing a receipt can be problematic. Some companies might accept a detailed explanation or a credit card statement as a substitute, but it depends on the company’s policy and the amount of the expense. Contact your finance department for guidance. As a best practice, it is best to maintain copies of your expenses using mobile apps for expense tracking.

5. Are there limits on how much I can spend on a reimbursable expense?

Yes, most companies have limits on certain expenses, particularly meals and entertainment. These limits are usually outlined in the reimbursement policy. Exceeding these limits may result in non-reimbursement or require additional justification.

6. How long does it take to get reimbursed?

The reimbursement timeframe varies by company. Some companies process reimbursements weekly, while others do it monthly. Your company’s reimbursement policy should specify the typical processing time. Follow up with the accounting department if you haven’t received your reimbursement within the stated timeframe.

7. Can I get reimbursed for personal expenses?

Generally, no. Personal expenses are not reimbursable. Reimbursable expenses must be directly related to business activities and properly documented. Attempting to claim personal expenses could result in disciplinary action.

8. Are mileage reimbursements taxable?

Mileage reimbursements are generally not taxable to the employee as long as they are at or below the standard mileage rate set by the IRS. The IRS standard mileage rate changes annually. Amounts exceeding the IRS rate are considered taxable income.

9. What if I use my personal credit card for business expenses?

Using a personal credit card for business expenses is common. However, it’s crucial to keep detailed records of these expenses and submit them for reimbursement according to your company’s policy. Ensure that the expenses are clearly business-related and not mixed with personal charges.

10. What happens if my reimbursement request is denied?

If your reimbursement request is denied, ask for a clear explanation from your manager or the accounting department. Understand the reason for the denial and provide additional documentation if necessary. If you believe the denial is unfair, follow your company’s internal dispute resolution process.

11. What is an accountable plan?

An accountable plan is a reimbursement arrangement that meets specific IRS requirements. To be considered an accountable plan, expenses must have a business connection, be adequately accounted for within a reasonable time, and any excess amounts must be returned to the employer within a reasonable time. Accountable plans allow reimbursements to be tax-free to the employee.

12. How does expense management software help with reimbursements?

Expense management software automates the reimbursement process, making it more efficient and transparent. It allows employees to easily submit expense reports, track receipts digitally, and ensures that expenses are compliant with company policies. It simplifies approval workflows for managers and provides valuable data insights for finance teams.