Process

8 Expense Policies Every Company Needs Now

By The Center Team on October, 31 2019
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It’s not uncommon for fast-growing companies to postpone spelling out a formal expense policy, but this is one task that should not be delayed. IRS requirements apply to organizations of every size, and it’s far better to build in compliance from the beginning than try to play catch-up later.

The good news is that focusing on IRS compliance is an excellent place to start. Here’s a rundown of the current IRS requirements that your expense policies must incorporate, along with practical tips for ensuring compliance and ideas for next-level expense policies that will strengthen your fiscal culture and support your overall strategy.

1. Ordinary and Common Expenses

The IRS says:
Expenses must be ordinary and necessary in your industry—not lavish or extravagant.

This means:
Which expenses are reasonable depends on the context. For example, in healthcare, spending $300 on computer games would likely be considered unusual, but at a game company, such an expense might be common for research. Similarly, spending $1,000 on a dinner might be commonplace to close a six-figure software deal, but considered lavish for a startup focused on prototyping a new product.

Taking it further:
Strengthen your fiscal culture by discussing ordinary and common expenses as a team. Bring examples of actual submitted expenses forward for team discussion to establish a shared understanding of what types of expenses make sense. Also consider adjusting your expense approval process at certain spend thresholds, so that larger expenses require review by a more senior manager.

In practice:
Be sure your expense policy includes clear examples of ordinary and necessary expenses, as well as “lavish and extravagant expenses.” Update these examples regularly and circulate reminders broadly, as new edge cases are brought forward for consideration.

2. Business Purpose

The IRS says:
The business purpose must be documented.

This means:
The purpose of each trip, or subscription, or office purchase should be captured and attached to the relevant expenses.

Taking it further:
Encourage team members to tie business reasons to larger companies strategies and goals. Instead of generic business reasons like “research,” or “sales,” coach team members to be more specific—for example, “competitive research to ensure strong positioning for new product X,” or “in-person demonstration to close contract with client Y.” This practice can help connect the dots between expenses and strategy more clearly. Consider resetting the list of acceptable business reasons quarterly or annually, to clearly align with company goals and help employees think more critically about why they are spending.

In practice:
Make sure your expense report tool or form includes a field for the business reason, and that your expense policy includes clear examples of acceptable (and unacceptable) business reasons. If expense reviewers start to see weak business purposes, provide feedback to ensure alignment with business strategy and guard against sloppy documentation and unessential purchases.

3. Documentary Evidence

The IRS says:
Documentary evidence must be retained (in the form of dated, itemized vendor receipts) for expenses greater than $75, all unitemized lodging expenses, and all expenses paid directly by an employee without using the business credit card, regardless of amount.

This means:
Yes, receipts are necessary, even in an increasingly paperless world. Digital records are sufficient, and certainly far easier to search and analyze if needed (for example, if your company is audited). A written statement or affidavit with specific information and other supporting evidence may be used in place of any lost receipts, but this should be the exception, not the rule.

Taking it further:
Consider requiring digital receipts for all expenses, not just those over $75, for a complete record of all transactions that can be invaluable for in-depth reporting and analysis. Also clarify exactly which line items can and can’t be expensed—alcohol, for example, generally cannot be, but it’s impossible to see what was spent on alcohol unless the detail is provided.

In practice:
Minimize exposure by coaching all expense reviewers to reject hotel expenditures without receipts, as well as receipts that aren’t itemized (for example, a restaurant signature slip instead of the full bill that lists what was ordered).

4. Documentation of Attendees

The IRS says:
Attendees of entertainment expenses, including meals, must be documented.

This means:
In addition to the business purpose of a meal or other entertainment expense, spenders need to indicate who was present and the business relationship—including employees and external vendors, partners, clients, or other attendees. The participants in any business discussion occurring directly before or after the entertainment must also be captured.

Taking it further:
Entertainment-focused meals on the company card can quickly spiral out of control. Set clear guidelines around who should attend meals, and who should pick up the bill. A common way to “game the system,” for example, is to have an employee whose manager is in attendance pay the bill, so the manager can rubber-stamp the expense. Consider establishing a policy where the most senior attendee pays, to maintain accountability. Encourage meal organizers to consider the business purpose and limit invites to those whose attendance is essential to achieving that purpose. If reviewers start regularly seeing expenses for large groups, it may be time to revisit policies or reset expectations about the frequency, size, and expense of these types of meals.

In practice:
Ensure your expense policy lays out clear expectations for business meals. Think through different scenarios and articulate guidelines for frequency and number of attendees—for example, visiting clients, team morale events, team dinners during a crunch time. If a large group is essential to the business reason, coach organizers to seek less expensive options, since costs can add up quickly. Be sure expense line items for meals include a field to indicate all attendees, and reject any submitted expenses without this required information. It’s also worth double-checking to ensure meal attendees are not submitting the same expense for reimbursal.

5. Mileage

The IRS says:
Automobile expenses can be reimbursed at IRS rates, but mileage or actual direct expenses must be documented.

This means:
The IRS mileage reimbursement, which is intended to cover gas and normal wear to an employee’s personal vehicle, does not apply to daily commuting (no matter how long your commute is, and even if you work while commuting), but it can apply to travel required for work, such as making sales calls, attending a meeting away from the regular workplace, or picking up supplies. Employees must submit detailed records of the actual miles driven or specific expenses incurred, along with their expense reports.

In practice:
Employees may not have a detailed understanding of the IRS specifics, so spell them out in your expense policy. Make it crystal clear that employees can’t include miles driving to and from work, miles driving a company vehicle, or gas or other auto expenses if they are claiming the mileage reimbursement. Give examples of mileage that can be reimbursed and mileage that can’t be, along with a template for a mileage log that includes all the necessary information.

6. Per Diem Rates

The IRS says:
Per diem payments for travel expenses are allowed, as long as the amounts do not exceed the federal per diem rates.

This means:
You can choose to simplify expense reporting by allocating a set amount to cover lodging, meals, and incidental expenses for each day of a business trip. If an employee ends up spending less, they keep the difference. The catch is that the allowed amount varies depending on the location (since, after all, expenses vary widely depending on the location), and it’s the company’s responsibility to ensure its per diem rates comply with current GSA guidelines. Employees must also substantiate the other elements of their travel expenses, such as time, place, and business purpose.

Taking it further:
Although companies might not love the idea of employees keeping unspent money, per diems can be a great way to encourage more thoughtful spending on business trips. If you’re not using per diems, it is certainly worth taking the time to compare current per diem rates to actual daily expenses incurred by your team in different locales, and adjusting policies or encouraging employees to rein in daily expenses if the gap is significant. You could even suggest reasonable daily expenses for specific locations, even if you’re not distributing per diem payments.

In practice:
If you aren’t using per diems, establish a quarterly review to check spending in a handful of locales against current guidelines, and adjust policies or coach team members if needed. And if you are, be sure to clarify who owns establishing the correct per diem rate when the trip is approved, and to spell out in your expense policy which expenses should be covered by the per diem, and which don’t need to be (for example, taxi or Uber, supplies, etc.).

7. Reasonable Time

The IRS says:
Expenses must be claimed and accounted for in a reasonable time—generally within 60 days after the expenses were paid or incurred.

This means:
No, technically, employees can’t save up all of their expenses and submit them once a year, or even less frequently. But it falls to you to clearly communicate what a “reasonable time” means, and there are additional rules and time guidelines for distributing advances.

Taking it further:
Educate team members on what happens when they delay submitting their expenses—finance teams can’t produce the reports they need, reports are incomplete and inaccurate, and it’s hard for leaders to steer the business when unexpectedly huge expense reports come in out of the blue. Remind them that even if their own expenses don’t seem significant, if you multiply them by the number of employees in the company, those numbers get big pretty quickly. It’s difficult for companies to meet their targets or even plan when they don’t know where they stand.

In practice:
Set clear guidelines for when expenses must be submitted for reimbursement, and stick to them. Talk with team members about tools or process changes that might streamline the process, and consider hard incentives, like only allowing employees to keep points on their expenses if they submit their reports within a set time period.

8. Retaining Records

The IRS says:
Companies must keep records for at least 3 years.

This means:
Expense reports and their supporting documentation must be stored, either physically or digitally, for 3 years—or longer, if certain situations apply.

Taking it further:
Looking at trends on this time frame - expenses per employee, or some other metric, to see if overall expenses are rising or falling? Investing in software to do this automatically and reduce manual effort?]

In practice:
Digital files are a huge advantage here, but even then it’s worth establishing a consistent schedule to keep things clean and current without overloading servers.

 
TO THE POINT: Incorporating IRS requirements into your company’s expense policies—and even better, building them right into your tools and processes so they are audited and enforced automatically—is critical to building a strong fiscal culture and that supports your long-term business goals.

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