Taxes can be a real headache for business owners, especially when it comes to figuring out which expenses you can and can’t deduct. Fortunately, the IRS provides a handy guide to help businesses navigate this complex landscape: Publication 535, also known as Business Expenses.
This publication breaks down everything you need to know about deducting business expenses, from the basics of what qualifies as a deduction to the specific rules for different types of expenses.
But let’s be honest, IRS publications aren’t exactly known for their user-friendliness. They can be dense, jargon-filled, and difficult to understand.
That’s why we’ve put together this 101 guide to IRS publication 535, designed specifically for small and medium-sized business owners. We’ll break down the key takeaways from each chapter in plain and simple English so you can understand what you need to know without getting bogged down in the details.
IRS Publication 535 is a comprehensive guide to business expenses, covering everything from the general rules for deducting expenses to the specific rules for different types of expenses.
IRS Publication 535 differs from other IRS publications in that it focuses specifically on business expenses. Other publications may cover various topics, such as individual income taxes or tax-exempt organizations.
The following section summarizes key information from IRS Publication 535. For more detailed information and official guidance, please refer to the full publication on the IRS website.
Businesses need to understand deductible expenses because they can significantly reduce your tax liability. Bu deducting eligible expenses, you can lower your taxable income and pay less in taxes.
Ordinary and necessary expenses are those that are common and accepted in your industry and are helpful and appropriate for your trade or business.
For example, if you own a bakery, the cost of flour, sugar, and eggs would be considered ordinary and necessary expenses.
Cost of Goods Sold (COGS) includes the cost of materials, labor, and overhead directly related to producing the goods you sell.
Gross Profit = Gross Receipts (Sales) - COGS
Your gross profit is the amount you’ll pay taxes on.
For example, if your bakery has $500,000 in sales and $200,000 in COGS, your gross profit is $300,000.
Capital expenses are costs that add value to your business assets or extend their useful life, such as buying equipment or making improvements to your property. These expenses aren’t deducted immediately but recovered over time through depreciation, amortization, or depletion.
For example, if you buy a new oven for your bakery, you would depreciate the cost of the oven over its useful life.
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Business expenses are those that are incurred specifically for your business operations. Personal expenses are those that are not related to your business. You can only deduct expenses that are directly related to your business activities.
For example, you can deduct the cost of your bakery's utilities, but you can't deduct the cost of your home utilities.
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If you use part of your home exclusively and regularly for business, you may be able to deduct expenses like mortgage interest, insurance, utilities, repairs, and depreciation. There are specific requirements you must meet to qualify for this deduction.
For example, you must use the space exclusively for business, and it must be your principal place of business.
If you use your car for business purposes, you can deduct expenses like gas, oil, repairs, insurance, and depreciation. You can either track actual expenses or use the standard mileage rate.
For example, if you drive 10,000 miles for a business in a year and the standard mileage rate for 2025 is 70 cents per mile, you can deduct $7,000.
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Generally, you can deduct the full amount of ordinary and necessary business expenses. However, there are limitations and exceptions to this rule.
For example, there are limits on how much you can deduct for meals and entertainment expenses.
When you can deduct an expense depends on your accounting method. Cash-method taxpayers deduct expenses when they pay them, while accrual-method taxpayers deduct them when they incur the liability.
For example, if you're a cash-method taxpayer and you buy supplies for your bakery in December but don't pay for them until January, you would deduct the expense in January.
If you're not carrying on your business to make a profit, you can't deduct losses from that activity to offset other income. There are specific rules for determining whether an activity is for-profit or not.
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Here are some of the most common business expenses that you can deduct:
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To be deductible, employee pay must be ordinary and necessary, reasonable, and for services performed.
For example, if you pay your employees a reasonable salary for the work they do, you can deduct those salaries as a business expense.
Employee pay can include salaries, wages, bonuses, commissions, awards, fringe benefits, and reimbursements.
For example, you can deduct the cost of your employee's health insurance premiums.
Rent is any amount you pay for the use of property you don't own. It's deductible if it's for property used in your trade or business.
For example, you can deduct the rent you pay for your bakery's storefront.
Generally, rent paid in advance is deductible in the year it's paid or incurred. However, there are special rules for accrual-method taxpayers and for payments that cover more than 12 months.
For example, if you pay rent for the next 12 months in December, you can deduct the entire amount in December if you use the cash method of accounting.
You can deduct taxes on leased property as additional rent. The timing of the deduction depends on your accounting method.
For example, if you're a cash-method taxpayer paying property taxes on your leased storefront in June, you can deduct the taxes in June.
Costs of getting a lease, such as payments to the previous lessee, are amortized over the term of the lease.
For example, if you pay $10,000 to take over a lease with 10 years remaining, you can deduct $1,000 per year for 10 years.
Improvements made by lessees to the property are depreciated over their useful life, not the term of the lease.
For example, if you install new ovens in your bakery, you would depreciate the cost of the ovens over their useful life, even if your lease is shorter than the ovens' useful life.
You may have to capitalize rent expenses under the uniform capitalization rules if you produce or acquire property for resale.
For example, if you rent a warehouse to store ingredients for your bakery, you may have to capitalize the rent expense as part of the cost of your inventory.
If you use loan proceeds for more than one purpose, you must allocate the interest based on how the funds were used.
For example, if you use 70% of a loan to buy equipment for your bakery and 30% to pay for a family vacation, you can deduct 70% of the interest as a business expense, and the remaining 30% is non-deductible personal interest.
There's a limit on how much business interest expense you can deduct each year. This limitation is designed to prevent businesses from deducting excessive interest payments. The limit is generally 30% of your adjusted taxable income.
You can deduct interest on loans used for business expenses as long as you meet certain requirements.
For example, you must be legally liable for the debt, and you and the lender must have a true debtor-creditor relationship.
You can't deduct personal interest, interest that must be capitalized, or interest on certain life insurance policies.
For example, you can't deduct the interest on your home mortgage.
You have to capitalize interest on debt used to produce real property or certain tangible personal property for use in your business or for sale to customers.
For example, if you take out a loan to build a new bakery, you would capitalize the interest on that loan as part of the cost of the building.
The timing of the interest deduction depends on your accounting method. Cash-method taxpayers deduct interest when they pay it, while accrual-method taxpayers deduct it as it accrues.
For example, if you're a cash-method taxpayer paying interest on a business loan in June, you can deduct the interest in June.
Below-market loans are loans where no interest is charged, or the interest rate is below the applicable federal rate. There are special rules for these loans, which may require you to impute interest income and expense.
For example, if you receive a below-market loan from a family member to help start your bakery, you may have to impute interest income, and your family member may have to impute interest expense.
You can deduct various federal, state, local, and foreign taxes that are directly attributable to your trade or business.
For example, you can deduct state and local sales taxes that you pay on business supplies.
Generally, you can only deduct taxes in the year you pay them. For example, if you pay your bakery's property taxes in October, you can deduct the taxes in October.
Deductible real estate taxes are those levied for the general public welfare. You can't deduct taxes for local benefits that increase the value of your property.
For example, you can deduct your bakery's general property taxes, but you can't deduct special assessments for street improvements.
Corporations and partnerships can deduct state and local income taxes. Individuals can deduct state and local income taxes as an itemized deduction on their personal income tax return.
For example, if your bakery is a sole proprietorship, you would deduct your state and local income taxes on Schedule A of your Form 1040.
You can deduct the employer's share of Social Security, Medicare, and federal unemployment taxes. You can also deduct state unemployment taxes.
For example, if you pay $10,000 in wages to your employees, you can also deduct the employer's share of Social Security and Medicare taxes on those wages.
You can deduct other taxes, such as excise taxes, franchise taxes, fuel taxes, occupational taxes, personal property taxes, and sales taxes if they are incurred in the ordinary course of your business.
For example, if you pay a fuel tax on the gas you use to deliver baked goods, you can deduct that tax.
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You can generally deduct premiums for insurance that covers business-related risks, such as fire, theft, liability, and workers' compensation.
For example, if you pay $5,000 per year for general liability insurance for your bakery, you can deduct that $5,000.
You can't deduct premiums for personal insurance, such as life insurance or disability insurance.
For example, you can't deduct the premiums for your personal life insurance policy.
You can generally deduct insurance premiums in the tax year to which they apply.
For example, if you pay your bakery's liability insurance premiums in March for the following 12 months, you can deduct the portion that applies to the current tax year.
You may have to capitalize insurance premiums under the uniform capitalization rules if you produce or acquire property for resale.
For example, if you purchase a new oven for your bakery, you would capitalize the insurance premiums on the oven as part of the cost of the oven.
Carrying charges are taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. You can choose to deduct or capitalize these charges.
For example, if you pay property taxes on land you're developing for a new bakery location, you can choose to deduct those taxes or capitalize them as part of the cost of the land.
Research and experimental costs are those incurred for activities that eliminate uncertainty about the development or improvement of a product. These costs must be amortized over a 5-year period for domestic research or a 15-year period for foreign research.
For example, if you spend $100,000 on research to develop a new type of pastry for your bakery, you would amortize that cost over 5 years.
Intangible drilling costs (IDCs) are certain drilling and development costs for oil, gas, or geothermal wells in the United States. You can choose to deduct these costs currently or amortize them over 60 months.
For example, if you drill a well to produce geothermal energy to power your bakery, you can choose to deduct the IDCs immediately or amortize them over 5 years.
Exploration costs are those incurred to determine the existence, location, extent, or quality of any mineral deposit. You can choose to deduct these costs currently or capitalize them.
For example, if you hire a geologist to assess the potential for geothermal energy on your property, you can choose to deduct the geologist's fees or capitalize them as part of the cost of the geothermal deposit.
Development costs are those incurred to develop a mine or other natural deposit after the existence of commercially marketable quantities has been determined. You can choose to deduct these costs currently or capitalize them.
For example, if you spend money to develop a geothermal deposit after the geologist has confirmed its existence, you can choose to deduct the development costs or capitalize them as part of the cost of the geothermal deposit.
Circulation costs are those incurred to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical. You can choose to deduct these costs currently or capitalize them.
For example, if you own a bakery and you pay for advertising in a local magazine to promote your business, you can choose to deduct the advertising costs or capitalize them.
Business startup costs are those incurred before you begin operating your business, such as advertising, travel, and employee training.
Organizational costs are those incurred to create a corporation or partnership. You can choose to deduct a limited amount of these costs immediately and amortize the rest over 180 months.
Reforestation costs are those incurred to plant or seed trees for forestation or reforestation. You can choose to deduct a limited amount of these costs immediately and amortize the rest over 84 months.
For example, if you own a bakery and you plant trees on your property to offset your carbon footprint, you can deduct a limited amount of the planting costs immediately and amortize the rest over 7 years.
Retired asset removal costs are those incurred to remove a retired asset in connection with the installation or production of a replacement asset. You can deduct these costs.
For example, if you remove an old oven from your bakery to make room for a new one, you can deduct the removal costs.
Barrier removal costs are those incurred to make a facility or public transportation vehicle more accessible to people with disabilities or the elderly. You can choose to deduct a limited amount of these costs immediately and capitalize the rest.
For example, if you install a ramp to make your bakery accessible to wheelchair users, you can deduct a limited amount of the ramp's cost immediately and depreciate the rest over its useful life.
Film and television production costs are generally capital expenses. However, you can choose to deduct a limited amount of these costs if the production meets certain requirements.
For example, if you produce a commercial for your bakery, you may be able to deduct a limited amount of the production costs.
Repair and maintenance costs are those incurred to keep your property in good working order. You can generally deduct these costs.
For example, if you pay to have your bakery's ovens cleaned and serviced, you can deduct those costs.
You deduct amortization by completing Part VI of Form 4562 and attaching it to your income tax return.
For example, if you're amortizing the cost of a lease, you would report the amortization deduction on Form 4562.
You amortize business startup and organizational costs over 180 months.
For example, if you have $10,000 in startup costs for your bakery, you would amortize those costs over 15 years.
You amortize the costs of getting a lease over the term of the lease.
For example, if you pay $10,000 to take over a lease with 10 years remaining, you can deduct $1,000 per year for 10 years.
Section 197 intangibles are certain intangible assets, such as goodwill, going concern value, and patents. You amortize these costs over 15 years.
For example, if you buy a bakery and the purchase price includes $50,000 for goodwill, you would amortize that goodwill over 15 years.
You amortize reforestation costs over 84 months.
For example, if you have $10,000 in reforestation costs, you would amortize those costs over 7 years.
Geological and geophysical costs are those incurred in connection with oil and gas exploration or development. You amortize these costs over 24 months.
For example, if you spend $50,000 on geological surveys for oil and gas on your property, you would amortize that cost over 2 years.
You amortize the cost of a certified pollution control facility over 60 months.
For example, if you install a new air filtration system in your bakery, you would amortize the cost of the system over 5 years.
You amortize research and experimentation costs over 5 years for domestic research or 15 years for foreign research.
For example, if you spend $100,000 on research to develop a new type of pastry for your bakery, you would amortize that cost over 5 years.
You can choose to amortize certain tax preference items over a specified period. For example, you can choose to amortize intangible drilling and development costs over 60 months.
You can claim depletion if you have an economic interest in mineral property or standing timber. For example, if you own a bakery and you also own a timber farm, you can claim depletion on the timber you harvest from your farm.
Mineral property includes oil and gas wells, mines, and other natural deposits. For example, a coal mine is a mineral property.
Timber is standing trees that you own or lease. For example, the trees on your timber farm are considered timber.
Cost depletion is based on the cost of the natural resource and the estimated total number of units that can be recovered. For example, if you buy a coal mine for $1 million and you estimate that you can recover 1 million tons of coal from the mine, your depletion unit is $1 per ton.
Percentage depletion is based on a percentage of your gross income from the property. The percentage varies depending on the type of mineral. For example, the percentage depletion rate for coal is 10%.
There are special rules for the depletion of oil and gas wells. For example, there's a limit on the percentage of depletion you can claim for oil and gas wells.
There are also special rules for the depletion of mines and geothermal deposits. For example, the percentage depletion rate for gold is 15%.
A business bad debt is a loss from the worthlessness of a debt that was created or acquired in your trade or business.
For example, if you sell baked goods to a customer on credit and the customer never pays you, you can claim a bad debt deduction for the amount owed.
A debt becomes worthless when there's no longer any chance that you'll be able to collect the money owed.
For example, if you've tried to collect a debt from a customer but they've gone bankrupt, the debt is considered worthless.
You claim a business bad debt by using the specific charge-off method. This means you must charge off the debt on your books and records.
For example, if you determine that a customer's debt is worthless, you would write off the debt in your accounting records.
If you recover a bad debt you previously deducted, you must include the recovered amount in your income.
For example, if you wrote off a customer's debt in a previous year and they unexpectedly pay you, you must include the payment in your income.
Other miscellaneous expenses that you can deduct include advertising expenses, legal and professional fees, and office expenses.
For example, you can deduct the cost of advertising your bakery in a local newspaper.
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Expenses that are not deductible include personal expenses, entertainment expenses, and political contributions.
For example, you can't deduct the cost of your personal car or the cost of taking your family to a movie.
The IRS offers a variety of resources to help businesses with their taxes, including publications, forms, instructions, and online tools. You can also get help from a tax professional.
For example, you can find information about deducting business expenses on the IRS website or in Publication 535.
Managing business expenses can be a time-consuming and tedious process, but Fyle can help automate it and make your life easier. Fyle is an expense management software that offers a variety of features to help you track and categorize your expenses.
Understanding IRS Publication 535 is crucial for small and medium-sized business owners to maximize their tax deductions and minimize their tax liability.
By familiarizing yourself with the key takeaways from each chapter, you can make informed decisions about your business expenses and ensure you're following the IRS guidelines.
And don't forget, Fyle can help automate your expense tracking and categorization, making the process easier and more efficient.
Check out Fyle today to see how it can help you track your business expenses!
We've been hard at work this quarter to make expense management smarter, easier, and more tailored to your needs. From the launch of our AI-powered Fyle Copilot to new integration with Microsoft Dynamics 365, plus enhanced features for Sage Intacct and QuickBooks, we're excited to share how we're helping simplify your workflows. Let’s dive into the highlights that will make managing your company's finances smoother and more insightful than ever!
Fyle’s very own AI assistant - Copilot, is live in beta now. It is designed to give you rich insights into your company's expenses and reports by answering all sorts of questions about your company's expenses. Here are just a few things you can ask Copilot:
You can say goodbye to traditional reporting and insights and let Fyle Copilot give you actionable data insights using the latest cutting-edge AI. Check out our help article to learn how you can get access to Fyle Copilot. You can contact us at support@fylehq.com to sign up for beta!
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You can now delegate your account to multiple users within your organization. Delegation can be set up by admins or employees themselves. This is useful when you have more than one person coding and submitting expenses on your behalf. Moreover, having multiple delegates adds redundancy; in case one of your delegates is unavailable, another can continue with coding, making sure expense management doesn’t stop!
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Fyle’s much-awaited integration with Microsoft Dynamics 365 Business Central is now in Beta! This is a 2 way integration that would support import of chart of accounts and vendors as categories and merchants in Fyle and export of expenses from Fyle as Journal entries and Purchase Invoices in Dynamics 365 Business Central.
Employees of your organization can text receipts to Fyle, and once it is coded and approved, they can be automatically synced over to Dynamics 365 Business Central. This bi-directional integration also supports importing dimensions such as chart of accounts and vendors from Dynamics Business Central 365 to Fyle.
Moreover, you can even restrict specific projects or categories to employees based on what’s relevant to them! Reach out to support@fylehq.com to learn more and sign up for beta!
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Fyle’s integration with Sage Intacct now lets you import your Allocations from Sage Intacct to Fyle. These Allocations will be available in a dropdown list for users to select when creating expenses. The integration will also export the selected Allocation values back to Sage Intacct, which will then handle splitting transaction amounts into multiple dimensions based on how the allocation is set up.
If you have Allocations set up in your Sage Intacct account and use them to split transactions into multiple dimensions such as departments, locations, etc., and you are exporting expenses from Fyle as Bills or Journal Entries in Sage Intacct, this will help ensure that costs and revenues are accurately reflected in the appropriate areas of the business, making it easier to manage budgets and analyze financial performance.
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You can now import and view Expense accounts, Project+Cost Code+Cost Category, and Vendor Names along with their Codes as concatenated values in Fyle. The Codes are also visible during mapping and default value selection in export settings to prevent errors, especially when dealing with identical names. This will help your employees if they depend on codes rather than just names to organize and identify projects, categories, and other dimensions.This feature is available for Fyle’s integration for Sage Intacct, Sage 300 CRE & QuickBooks Online.
When exporting Credit Card Expenses from Fyle as Credit Card Purchases to QuickBooks Online & Sage Intacct, you can export all expenses split from a single transaction into one single Credit Card Purchase Entry on your accounting software
The Total Transaction Amount displayed on the entry will be the same as the summation of the amounts of all split expenses. This Total Transaction Amount will also match the transaction amount on the credit card statement. This will make your reconciliation process easier & faster!
We are also working on bringing this functionality to Fyle’s Netsuite integration very soon.
Fyle’s QuickBooks Desktop integration now supports posting expenses from Fyle to an item on QBD. If your organization is in the services or construction vertical and you use Items such as Products/Services in QBD to track business costs and create Job costing reports, and if you are exporting Credit Card Expenses as Credit Card Purchases in QuickBooks Desktop. In that case, you can easily configure items on Fyle to categorize and export expenses to the item detail in QuickBooks Desktop.
Explore these powerful new features if you haven’t already and keep an eye on this space for all the exciting developments in the next quarter! Learn more about Fyle and get a demo of the platform today.
Managing travel and expense (T&E) costs can become a significant challenge for businesses, especially as they scale. A well-defined travel and expense policy helps streamline these processes, ensures compliance, and reduces the risk of fraudulent claims.
In this guide, we’ll explain in six simple steps how to craft and implement an effective T&E policy, ensuring your business stays efficient and compliant.
A travel and expense policy is a set of guidelines established by a company to control, manage, and track all expenses related to business travel. This policy defines what constitutes an allowable expense, how to submit claims, and the approval process involved.
Having a T&E policy ensures that employees understand what is expected of them when traveling on business trips and keeps costs within budget.
When crafting a T&E policy, it’s essential to include the following components:
First, define what types of expenses are allowed and what is not. For example, are premium flights or five-star hotels permissible? Set budgets for accommodation, meals, and transportation based on employee levels and travel destinations.
Who approves travel requests? Define whether expenses need pre-approval and how employees can seek authorization for trips or specific expenditures. This reduces and helps enforce accountability.
Make it clear how employees should submit their expenses and set deadlines to ensure timely reimbursements. Include guidelines on what documentation, like receipts, is necessary to validate a claim.
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Create a framework for what happens if an employee fails to comply with the T&E policy. Include possible consequences for violations, such as delayed reimbursements or disciplinary actions.
Make sure your policy adheres to tax regulations by allowing only deductible expenses. Following IRS guidelines (as outlined in IRS Publication 463) helps your business stay compliant and prevents issues during audits.
After drafting your policy, ensure it’s well-communicated to employees. Consider holding training sessions or webinars and ensure the document is easily accessible. Regularly review and update the policy as your business evolves.
With Fyle, you gain complete control and visibility into your corporate travel and expense management processes. Here’s how you can experience real-time travel expense reporting and manage employee travel expenses with ease.
Get real-time text message alerts for credit card transactions. Instantly reconcile by replying with a photo of the receipt. Fyle also allows your employees to track and submit travel expense receipts using popular apps.
Simplify employee mileage tracking and configure commute deductions for accurate calculations. Apply exact Per Diem rates tailored to various currencies, employee roles, departments, and locations.
Fyle’s T&E software integrates with TravelPerk to automatically reconcile all trip-related expenses. After booking a trip and paying an invoice on TravelPerk, Fyle generates a travel expense report with details like the invoice date, trip ID, traveler info, and total amount. This automation saves hours of manual effort and ensures accurate data.
Fyle’s automated policy and compliance engine checks receipts, expenses, approvals, and payment data before submission, organizing them perfectly for audits and accounting. This ensures smooth audits and helps prevent expense fraud.
Fyle automatically syncs employee travel expenses with your accounting software. It seamlessly connects with platforms like NetSuite, QuickBooks, Sage Intacct, Xero, and Sage CRE.
A tax-deductible business expense is any cost incurred by an organization that can be subtracted from its taxable income, thereby reducing its tax liability. These expenses must be ordinary, necessary, and reasonable for the business to operate.
Some examples of tax-deductible business expenses include:
What expenses can be written off will vary depending on the nature of your business. To learn more, refer to IRS Publication 535, which covers the deductibility of business expenses and tax filing rules.
To comply with tax rules, it’s essential to understand what travel expenses are deductible. Common examples of deductible travel expenses include airfare, lodging, meals (with limits), and business-related transportation.
For a more comprehensive breakdown of what you can and cannot deduct, review IRS Publication 463 or check out our detailed guide on travel expenses.
A travel and expense policy focuses on expenses related to business travel, while an expense policy may cover a broader range of general business-related costs.
You can enforce compliance by clearly communicating the policy, ensuring proper training, setting up approval workflows, and using expense management tools like Fyle to track and monitor expenses.
Common expenses include airfare, lodging, meals, ground transportation, and other travel-related costs like baggage fees or internet access at hotels.
This depends on your policy. Some companies prefer issuing corporate credit cards, while others allow personal credit cards and then reimburse employees after expenses are submitted.
It’s good practice to review your T&E policy annually or whenever there are significant changes in travel patterns, company growth, or regulatory updates.
Managing travel expense reimbursements is a crucial aspect for businesses that require employees to travel for work. Ensuring clarity on what can be reimbursed, how it should be reported, and staying compliant with IRS rules can prevent misunderstandings and streamline your financial processes.
In this guide, we’ll walk through everything you need to know about travel expense reimbursement, from defining reimbursable expenses to how tools like Fyle can simplify the entire process.
Travel expense reimbursement refers to the process through which businesses compensate employees for any reasonable and necessary expenses they incur while traveling for work.
These expenses typically include transportation, meals, lodging, and other travel-related costs.
By having a clear travel reimbursement policy in place, companies can avoid confusion and ensure that employees are fairly compensated for legitimate business expenses while traveling.
You can reimburse employees for ordinary and necessary expenses incurred when traveling away from home on business. The type of expenses you can reimburse largely depends on the nature of the trip and the specific policies of your organization.
Here’s a breakdown of reimbursable travel expenses:
Let’s say an employee drives from Dallas to a business conference in Houston, staying at a hotel overnight. The employee incurs gas expenses of $60, pays $150 per night for lodging, and spends $40 on meals.
The company will reimburse the employee for the mileage rate equivalent to $60 for gas, $150 for the hotel, and 50% of the meal cost, which comes to $20 (as meals are subject to a 50% deduction limit).
However, if the employee brings a spouse on the trip and books a larger hotel room, only the portion of the expense applicable to the employee’s travel would be reimbursable.
The IRS has clear guidelines to help businesses manage travel reimbursements and ensure compliance with tax regulations.
Following these rules not only helps businesses stay compliant, but also prevents issues during audits, and ensures employees are reimbursed for legitimate business expenses.
Here’s a closer look at the key IRS rules businesses should follow:
Employees can claim the actual cost of their meals, but they must keep detailed records and receipts for each expense. This method is more accurate but requires thorough documentation, which can be time-consuming for both the employee and the employer.
The IRS also offers a simplified approach called the “standard meal allowance.” Instead of itemizing meal expenses, employees can claim a set per diem amount of meals and incidental expenses (M&IE).
For instance, in 2025, the standard meal allowance is $68 per day for most U.S. locations. This method reduces the need for keeping meal receipts and simplifies the reimbursement process.
The standard meal allowance can be used by both employees and self-employed individuals, regardless of whether their travel expenses are reimbursed.
The set rate is easy to use and provides a consistent approach across multiple trips. However, it may not fully cover actual costs in expense locations.
For business travel within the U.S., businesses can generally deduct the full amount of business-related travel expenses. These include transportation (airfare, car rental, etc.), lodging, and meals (subject to the 50% limitation on meals). More on the 50% limit later.
If an employee combines business travel with personal activities (e.g., a vacation), only the expenses related to business can be reimbursed. Personal expenses, such as sightseeing tours or meals during non-business days, are not deductible.
Example: An employee travels to Los Angeles for a 5-day business conference but decides to stay an extra 3 days for personal vacation. The company can only reimburse travel, lodging, and meal expenses for the 5 business days. The costs incurred during the 3 vacation days are personal and not reimbursable.
If the purpose of the trip is primarily personal, with only a minor business component, the trip’s travel expenses cannot be reimbursed as business-related costs.
The IRS imposes more stringent rules on international business travel, especially when the trip mixes business with personal activities. If a portion of the trip involves non-business activities, only part of the travel expenses can be deducted.
If the primary purpose of the trip is business, the cost of getting to and from the destination is fully deductible. If the trip is mainly for personal purposes, even if some business activities are conducted, travel expenses are not deductible.
For mixed-purpose trips, businesses need to allocate costs between business-related and personal expenses. Only the portion related to business can be reimbursed or deducted.
Example: An employee flies to London for a week-long business meeting but spends 3 extra days vacationing in Paris. The cost of the airfare to and from London can be deducted, but the cost of traveling to and staying in Paris is personal and not reimbursable.
Expenses related to attending business-related conventions or meetings can be reimbursed. However, certain conditions apply:
The convention must directly relate to the employee’s job or the business’s operations. For instance, attending an industry-specific conference that offers skill development or business insights would qualify.
If an employee brings a family member (such as a spouse or child), their travel expenses are not deductible unless the family member is also an employee with a bona fide business purpose for attending.
Example: If an employee travels to a technology conference in New York and brings their spouse, the company can reimburse the employee’s flight and hotel costs, but the spouse’s expenses (e.g., additional airfare and meals) are not reimbursable unless the spouse has a legitimate business role in the trip.
The IRS has specific rules on the deductibility of meals and entertainment expenses. Changes in recent years have tightened the ability to deduct entertainment-related costs.
Businesses can deduct 50% of the cost of meals, provided they meet the following conditions:
Example: If an employee takes a client out for lunch during a business meeting, the company can deduct 50% of the meal cost.
Since 2018, the IRS has disallowed deductions for most entertainment expenses. This includes costs associated with attending concerts, sporting events, or other recreational activities.
However, businesses can still deduct 50% of the cost of meals provided at such events as long as they meet the IRS criteria for a business meal.
Some specific types of entertainment-related expenses are still deductible, including:
The IRS requires businesses to maintain adequate records of travel-related expenses. Proper documentation ensures compliance with IRS rules and helps businesses defend their deductions during audits.
For expenses over $75, businesses must maintain receipts or other documentary evidence (e.g., hotel bills and flight itineraries). However, small expenses (under $75) and certain transportation costs may not require receipts.
For more information, please refer to IRS Publication 463 (2023), Travel, Gift, and Car Expenses
A well-defined travel reimbursement policy clarifies what expenses your company will reimburse and sets clear expectations for employees. This ensures responsible spending and simplifies the reimbursement process. Here’s how to create one:
Start by specifying which types of expenses are reimbursable. Common categories include:
Generally, businesses require receipts to substantiate travel expenses. However, there are exceptions:
Employees should keep detailed records of expenses, including the date, amount, and purpose of each expenditure, even if receipts are not needed.
Most travel reimbursements under an accountable plan are non-taxable. This means that if employees properly account for their expenses and return excess reimbursements, the company does not have to report these amounts as income, and employees do not pay taxes on them.
Under a non-accountable plan, reimbursements are considered taxable income. In this case, the company would include the reimbursement amount on the employee’s W-2, and the employee would pay taxes on it.
Fyle provides a powerful solution to simplify and streamline the travel reimbursement process. Here's how:
Have you ever returned from a business trip with a mountain of receipts and a sinking feeling of dread about the travel expense reports you’d have to submit?
Well, you’re not alone. Sadly, a travel expense report (T&E report) is the key to ensuring your reimbursements arrive on time. We’ll tell you how you can make the process easier and even let you in on a little secret–that you’d never have to spend another second on it ever again.
How? Read on to find out.
Think of a T&E report as a detailed log of your business travel expenses. It documents everything you spent on your trip–from flights, hotels, meals and miscellaneous expenses–for reimbursement by your employer.
It also serves as a record-keeping tool for the company, ensuring there’s proper visibility into spend and compliance with company policies.
A typical T&E report includes the following sections:
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Travel expense reports are more than a documentation hurdle–they’re really the cornerstone of financial discipline, transparency, and compliance within your organisation. Here’s why they matter:
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Conquering travel expense reports doesn’t have to be a battle. Here are some tips you can use:
Or use the ultimate choice, a travel expense report software. You can automate the entire process to save yourself (and your company) time and money.
Templates can be a helpful starting point, but let's delve deeper and explore just how they’d stand up against a travel expense report software.
The age-old question: Should I use a free travel expense report template or pay for travel expense report software? But did you know that a free expense report template might be costing you more than you realise?
Travel expense report templates are free and readily available online, making them a seemingly attractive option. They’re simple and the perfect choice for an organization's most basic needs. However, they can be time-consuming (manual data entry), prone to errors, and cumbersome for frequent travelers.
Did you know? The average expense report takes a massive 20 minutes to process.
But this is just the tip of the iceberg. Here’s a breakdown of the true time cost when travel expense reports are processed manually:
The Math Doesn’t Lie. That’s a total of 20 minutes per claim on average. But wait, there’s more! According to the Global Business Travel Association, a shocking 19% of all expense reports contain errors. And correcting each one takes an additional 18 minutes! Suddenly, that 20-minute claim balloons to a 38-minute ordeal.
Do you feel the time drain? It’s not just you. Imagine the productivity lost for both employees and your finance team. This inefficiency translates to real costs. GBTA found the average expense report costs a staggering $58 to process (and it’s likely that the number is even higher today.)
Let’s crunch these numbers together:
Imagine a company processing an average of 30 expense reports per month. Without errors, that's roughly $21,600 spent annually on the reporting process.
However, factor in those error corrections, and the annual cost jumps to nearly $33,120. That's over $11,500 wasted on fixing mistakes!
And it's important to remember this is just an example for a medium-sized company. For larger organizations with higher volumes of reports, the potential cost drain can be even more significant.
While templates seem like a free option, they’re costing you in hidden ways. Consider this: wouldn’t your time and money be spent focusing on core business functions?
Now, why is this the superior alternative? Because it can automate the entire process for you at just $11:99 a month. But what does this really mean?
A travel expense report software doesn't just save time, it saves money. Imagine the cumulative effect of automating receipt collection, eliminating errors, streamlining approvals, and boosting employee productivity.
Travel expense reports don’t have to be a source of stress. By understanding the purpose, components, and available tools, you can easily navigate the process.
While free templates can help you get started, exploring a travel expense report software is a no-brainer for growing organizations looking for better efficiency and cost savings.
Schedule a demo today to see how Fyle can help your travel expense reporting process!
Smart spending habits go hand-in-hand with efficient reporting. Here are some things you can do:
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This can vary depending on your company’s specific travel policy, so it’s always best to check their guidelines first. Generally, acceptable expenses fall under these categories:
Pro tip: When in doubt, err on the side of caution and save all receipts. You can always clarify with your finance team later.
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This varies by company, but it’s typically within 30 days of your trip’s completion. Some companies might offer shorter deadlines (like 15 days) of een allow for extensions under specific circumstances. Check with your company’s travel policy or finance department for their specific timeframe.
Inform your manager or finance team as soon as possible. Depending on the company policy, they might require an explanation or ask for alternative documentation (like credit card statements) to verify the expense.
Double-checking your expenses doesn’t sound all that difficult, and it isn’t. For the individual, at least. When it comes to large businesses with hundreds or even thousands of people using company assets, keeping your financial accounting straight becomes infinitely more complex.
That’s why we’ve put together a guide to expense reconciliation. How it works, the potential roadblocks, and how to make it that much easier.
Expense reconciliation is the process of comparing and matching financial records related to business expenses. It involves checking that all the money spent by a business aligns with the recorded expenses in its accounting system. This process helps identify errors, discrepancies, or fraudulent activities.
While expense reconciliation may not be so difficult for small start-ups or self-employed individuals, larger businesses have so much more going on across different branches and departments to the point they might need enterprise collaboration software just to keep track of everything.
There are a lot of important reasons to reconcile your expenses, from conducting end-of-year reports and tax returns to monitoring budget and expenses. It’s essential to prevent things like:
As such, it’s in your best interest to make sure you’re reconciling expenses correctly.
The need to double-check figures is as old as the concept of business itself. As such, companies have been doing manual expense reconciliation for a long time. Some still use paper records, meaning they literally have to go over the books.
These days, however, many organizations use spreadsheets customized with automated functions to record and monitor financial reporting. For example, the figures from things like expense claims or company credit card statements get entered into the database for easy cross-referencing.
This helps streamline things and limit human error compared to the pen-and-paper approach, but there’s still a large amount of manual work involved.
There are a few different kinds of expense reconciliation to keep track of. Most are business-related, covering the various ways companies spend money.
Personal reconciliation is the only non-business-based entry on this list. An example of personal reconciliation would be checking tax-deductible expenses against your receipts when filing your tax return. Compared to the sheer variety of business expenses, personal financial accounting is much simpler.
Regular business expenses include things universal to most businesses, like payroll and inventory costs. Other needs are industry-specific. For example, the budget to promote a holiday company’s travel packages or safety equipment for construction workers.
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Reconciling customer expenses helps you stay aware of outstanding debts. While that’s more a matter of income than expense, it’s still an important part of broader budgeting concerns. You’ll also need to factor in any refunds to avoid accidentally creating imaginary profit or concealing real earnings.
Vendor reconciliation means checking your financial statements against those of your suppliers. For example, recreational spaces like theme parks typically have vendors supplying food, drinks, or even small events. The fact that each business has its own record-keeping theoretically means it’s easy to double-check your work.
Bank statements and account histories are valuable fallbacks if your internal record-keeping fails. Your bank will have full records of all transactions related to your company’s expense accounts in the event you otherwise can’t resolve a discrepancy.
Expense reconciliation is the cornerstone of financial health for any business. It’s more than just a numbers game; it’s a strategic tool that drives informed-decision making.
By accurately matching expenses to income, you create a clear financial snapshot. This helps you understand your business’s profitability, cash flow, and overall financial performance.
Regular reconciliation is your first line of defense against financial irregularities. It helps uncover discrepancies, identify potential fraud, and ensure the accuracy of your financial records.
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With reliable expense data, you can make informed decisions about budgeting, cost-cutting, and resource allocation. This empowers you to optimize your business operations and maximize profitability.
Accurate expense records are essential for meeting tax obligations and passing audits. Reconciliation ensures you have the necessary documentation to support your financial claims.
Effective expense reconciliation involves the following key steps:
Gather all relevant expense data, including receipts, invoices, credit card statements, and employee expense reports. Ensure the data is complete, accurate, and accessible.
Review collected data for errors, inconsistencies, or missing information. Verify that all expenses are accurately coded and have supporting documentation.
Compare expense data to accounting records, bank statements, and other relevant financial information. Identify and resolve any discrepancies.
Analyze the reconciled data to identify trends, patterns, or potential cost-saving opportunities. Use this information to improve financial performance. Fyle makes this quite simple:
You can analyse spend patterns across business credit card and reimbursable expenses, compare it across different time periods so you can make better decisions.
Although it sounds straight-forward in theory, expense reconciliation in practice involves a lot of potential obstacles and frustrations. While it’s hard to predict everything that could possibly go wrong, here are some of the issues businesses regularly encounter.
While automated, streamlined software is fast becoming the norm, many businesses still rely on old-fashioned written record-keeping to at least some degree. Unfortunately, that means you have to painstakingly pore through the numbers by eye.
It’s one thing to manually record a single stream of regular expenses you know to expect along the way, like payroll or employee insurance. It’s another thing entirely to track down every one-off expense, like legal expenses, or that outbound sales strategy workshop that not many staff attended.
Even partial automation may not actually save you that much time, as you still end up having to re-record a lot of information in a digitized form.
Again, if all you had to do was check transaction records from a single source, corporate expense reconciliation wouldn’t be nearly such a headache. In medium-to-large businesses, however, there might be any number of people with company credit cards or expense account access in some capacity.
Financial accountants must often spend a lot of time chasing up every last bill and invoice for discretionary expenses to dot the Is and cross the Ts. In situations like these, you’re at the mercy of the quality of your record-keeping system. If it’s paper-based, documentation could be missing or damaged.
The other issue with having so many people contribute to the mountain of expense information is that finances might not all be tracked to the same standards. People can easily forget to record payments or to carry the one in their sums. In fact, issues like these are why expense reconciliation is necessary to begin with.
Even if employees provide all the necessary financial information, they might record it in different formats, or in a way that’s unclear. All of this makes manual digitization that much more of a pain.
With data from so many different sources in so many formats, you need to convert it all into a unified standard. This might mean using specialized software, or simply putting it all into a spreadsheet. Even so, converting large amounts of finance data from one format to another can be as time-consuming as actually studying it.
Conversion aside, you need to be able to store your data too, whether physically or digitally. On top of that, as your business grows, you might reach the limitations of how much data your system can adequately process.
Expense reconciliation is time-consuming and often challenging for businesses, especially if done manually. With Fyle’s expense management software, you can integrate with any business credit card, to simplify the expense reconciliation process.
Here’s how we can help:
With the leaps and bounds of computer technology over the past couple of decades, you’d be forgiven for wondering why companies haven’t embraced it for financial accounting and expense reconciliation wholeheartedly.
People can often be resistant to change. If something still works, why swap it out for something you’re not used to?
On top of that, there are tangible real-world resource costs associated with any corporate systems migration, such as licensing and installation costs, lost productivity during adjustment, and so on.
Even so, the benefits of a modern expense reconciliation process are too big to ignore. By changing the way your people work, you can free up their time and energy for what really matters.
Aside from how slow they are to use, paper records are awfully perishable. So, not only are digitized records more efficient thanks to search bar utilities and keywords, they’re much safer too.
Sure, data loss, theft, and corruption are their own risks. But it’s much easier to have multiple virtual copies of your records stored in their own cyber-secure spaces.
On top of that, digitization is necessary to enable the next step in modernizing your expense reconciliation.
With virtual financial records, it’s possible to automate both the addition and analysis of financial data. Using a machine learning algorithm, you can check financial records against each other much faster than you would by eye.
We’re already seeing how AI customer service, for example, helps individuals complete or automate transactions and handle their finances. These sorts of algorithms can also help automate record-keeping for things like expense reports and company credit cards too. In theory, this helps to prevent human error and oversights.
As you digitize and automate financial accounting processes, you’ll find it easier to decentralize the burden of responsibility. Rather than your accounting team having to scramble to ensure receipt compliance and accuracy for every spending employee in the business, those staff members get the tools and knowledge necessary to supply their own record-keeping.
Expense reporting is the process of submitting expense claims for reimbursement, while expense reconciliation involves verifying and matching those expenses to accounting records.
The frequency of expense reconciliation depends on your business size and industry. Many companies reconcile expenses monthly, but some may require more frequent reconciliation for better control.
Some metrics to consider while reconciling expenses include:
Reconciliation time is the average time it takes to reconcile a specific period’s expenses.
How to track?
Calculate the time spent on data collection, verification, matching, and analysis for reach reconciliation period.
The percentage of errors found during the reconciliation process.
How to track?
Monitor the number of discrepancies found and divide it by the total number of transactions processed.
The average value of individual expenses.
How to track?
Calculate the total expenses for a period and divide by the number of transactions.
The percentage of revenue spent on expenses.
How to track?
Divide total expenses by total revenue for a specific period.
While corporate credit cards offer convenience and efficiency for businesses, managing them effectively can be a daunting task. Without proper oversight, corporate cards can lead to uncontrolled spending, fraudulent activities, and administrative headaches.
To help you out, we’ve crafted this guide to delve into the nitty gritty of efficient corporate credit card management, explore some best practices, and provide you with insights on how to choose the right card issuer.
By the end of this guide, you’ll have a better idea of how you can optimize your company’s spending, enhance financial control, and regain some of that lost sanity.
Corporate credit card management is the systematic process of managing and controlling the use of company-issued credit cards. It involves setting clear spending policies, monitoring card usage, reconciling statements, and ensuring compliance with financial regulations.
Effective management is crucial for maintaining financial health, optimizing cash flow, and preventing fraud.
Corporate credit card management is essential for several reasons:
Define what expenses are eligible for corporate cards, set spending limits, and outline approval processes.
Select a card issuer that aligns with your business needs, offers robust security features, and provides excellent customer support. Bank-issued cards often excel in these areas due to their established infrastructure and regulatory compliance.
Utilize a credit card expense management software to automate expense tracking, track company card spending, and generate detailed reports.
As your business evolves, revisit spending policies to ensure they remain relevant and effective.
Educate employees about card usage, expense reporting procedures, and fraud prevention.
Monitor card activity in real time and receive notifications for unusual or suspicious transactions.
Review and reconcile credit card statements to identify errors, unauthorized charges, and potential discrepancies.
Perform regular audits to assess card usage, and compliance with policies, and identify areas for improvement.
Maximize the value of your corporate card program by taking advantage of rewards and perks offered by the card issuer.
Emphasize the importance of responsible card usage and encourage employees to report any issues promptly.
While managing multiple corporate cards can be complex, here’s one of the easiest things you can do:
With Fyle you can have all your corporate card transactions in one dashboard. Here’s how:
While fintech companies have disrupted the financial industry, bank-issued corporate credit cards still offer several advantages:
Implementing robust security measures is crucial. This includes setting strong passwords, utilizing cardholder verification (CVV) codes, and enabling fraud alerts.
Regularly monitoring card activity and reporting suspicious transactions promptly can also help prevent unauthorized charges.
Contact your card issuer immediately to dispute the charge. Gather all necessary documentation, such as receipts and transaction details. Work closely with your company's finance department to resolve the issue promptly.
Consider factors such as annual fees, rewards programs, interest rates, and customer support when selecting a corporate credit card. Evaluate the card's alignment with your business's spending habits and industry-specific needs. Bank-issued cards often offer a wider range of features and benefits tailored to businesses of all sizes.
Ideally, corporate credit card statements should be reconciled monthly to ensure accuracy and identify any discrepancies. However, for businesses with high transaction volumes, more frequent reconciliation may be necessary.
But with tools like Fyle, credit card transactions are automatically reconciled as soon as employee submit their receipts via text!
Common red flags include unauthorized charges, unusual purchase amounts, transactions in unfamiliar locations, and discrepancies between receipts and card statements. Be vigilant and report any suspicious activity immediately.
As your business grows, the number of company-owned cards is likely to increase as well.
Using an expense management software can simplify corporate credit card management with features like real-time transaction feeds, text-message receipt submission, real-time spend visibility, and policy compliance.
Schedule a demo today to see how Fyle can simplify corporate credit card management!
