Bill.com is a cloud-based platform that automates accounts payable (AP) and accounts receivable (AR) processes. It streamlines bill payments, invoicing, and reconciliation, helping businesses manage their cash flow more efficiently. From an accounting perspective, Bill.com represents an expense related to financial operations and administrative efficiency.

The accurate categorization of Bill.com expenses is essential for several reasons. It allows financial controllers to maintain a clear understanding of financial operations costs, budget effectively for accounting tools, and ensure compliance with financial reporting standards. It also aids in analyzing the return on investment (ROI) for automation software and allocating expenses appropriately within the finance department, providing a detailed view of financial administration spending.

This guide aims to provide financial controllers with a comprehensive explanation of how to accurately classify Bill.com expenses. We'll also cover key accounting considerations relevant to these expenses and discuss the associated tax implications for businesses.

How to Classify Bill.com Expenses?

The most accurate way to classify Bill.com expenses is as Software Expenses or Administrative Expenses, depending on the specific features used and the company's accounting practices.

1. Software Expenses: Since Bill.com is a cloud-based platform that provides software to automate financial processes, the subscription fees are typically classified as Software Expenses. This reflects the subscription-based access to software that streamlines AP/AR workflows.

IRS Publication 535 discusses software expenses, differentiating between purchased software and subscription-based services, which aligns with Bill.com's subscription model.

2. Administrative Expenses: In some cases, particularly in smaller organizations or when Bill.com is part of a broader category, the fees might be included under Administrative Expenses. This category encompasses costs related to the general administration of a business.

While IRS Publication 535 doesn't explicitly categorize "accounting software subscriptions," it does discuss various administrative costs, and Bill.com fees can be seen as a cost of administering financial operations. Both classifications can be acceptable, but consistency is key. The chosen classification should be applied uniformly across all Bill.com expenses.

Expense Categories to Avoid for Bill.com

It's important to avoid some common but potentially inaccurate expense categories when classifying Bill.com, or to use them inconsistently. Here's a breakdown of why these categories are generally less preferred:

1. IT Expenses: While Bill.com is a technology, the "IT Expenses" category is often too broad. It can include hardware, networking costs, and IT labor, whereas "Software Expenses" is more specific for the software aspect.
2. Professional Fees: While Bill.com automates some accounting tasks, it's not a professional service like an accountant. "Software Expenses" more accurately reflects the nature of the tool.
3. Financial Services: This category might be used for banking or investment fees, not for software that facilitates financial operations.
4. Subscription Expenses: While technically correct, this is a subcategory of software expenses. It's better to use "Software Expenses" unless you need very granular tracking.

Important Note on Alternative Classifications

It's crucial to understand that some alternative classifications could be acceptable if applied consistently. However, consistency is paramount. A business should choose one classification method and apply it uniformly across all Bill.com expenses to maintain accurate and comparable financial records.

To maintain accuracy and clarity in financial reporting, Bill.com expenses should ideally be classified as Software Expenses or, less commonly, Administrative Expenses, used consistently.

Considerations While Categorizing Bill.com Expenses

When accounting for Bill.com expenses, several factors come into play:

1. Expense Recognition

• If Bill.com is paid monthly, the expense should be recognized in the month it is incurred.
• If Bill.com is paid annually, the expense should be allocated over the 12-month period. This aligns with accrual accounting principles, which dictate that expenses should be matched with the revenues they help generate, providing a more accurate picture of profitability within a specific period.
• Tip: When dealing with annual subscriptions, establishing a system to amortize the expense monthly ensures that the income statement accurately reflects the cost of using Bill.com in each accounting period.

2. Materiality

• For companies with substantial accounting software expenditures, creating a separate "Bill.com Expenses" account might be beneficial for detailed tracking and analysis.
• For companies with smaller budgets, including Bill.com expenses within general "Software Expenses" or "Administrative Expenses" accounts is acceptable.
• Tip: Assess the materiality of Bill.com expenses within your company's overall budget. If it's a significant expense, detailed tracking will provide better visibility and control.

3. Departmental Allocation

• Bill.com expenses are typically allocated to the finance or accounting department as they directly relate to those functions.
• Tip: While generally allocated to one department, analyzing Bill.com costs in relation to AP/AR volume or efficiency metrics can provide insights into the platform's value.

Examples of Bill.com Services and Their Classification

Here are a couple of examples of Bill.com services and how they can be classified:

• Bill.com Subscription Fees: The recurring fees for using the Bill.com platform are classified as Software Expenses.
• Bill.com Add-on Services: Costs for any additional features or services purchased within the Bill.com platform are also classified as Software Expenses.

What Are The Tax Implications for Bill.com Expenses?

From a tax perspective, Bill.com expenses are generally deductible business expenses, meaning they can be deducted from gross income to arrive at taxable income as long as they meet the IRS criteria.

1. To be deductible, the expenses must be "ordinary and necessary".

• An ordinary expense is one that is common and accepted in your trade or business.
• A necessary expense is one that is helpful and appropriate for your trade or business.

If a business pays for an annual Bill.com subscription, it could be considered a prepaid expense. IRS Publication 535 discusses the rules for deducting prepaid expenses, stating that if the benefit period extends beyond the current tax year, the expense must be allocated over the periods it benefits.

Tip: Be mindful of prepaid expenses, particularly with annual software subscriptions. Ensure that these expenses are properly amortized over the relevant tax years to comply with IRS regulations.

2. Amortization of Bill.com Costs: In general, Bill.com subscription fees are recurring operational expenses and are not amortized. Amortization typically applies to capital expenses, such as the purchase of intangible assets with a useful life of more than one year.

However, if a company were to develop custom software integrated with Bill.com or acquire a very large, multi-year license with unique terms that resemble an intangible asset, amortization might come into play. Additionally, accurate records of Bill.com expenses are essential for supporting deductions and complying with IRS requirements. This includes:

• Invoices from Bill.com.
• Proof of payment (e.g., bank statements, credit card statements).
• Internal records documenting the business purpose of the Bill.com subscription.

IRS Publication 463 and 535 emphasize the importance of maintaining detailed records of business expenses.

Tip: Implement a robust record-keeping system for all accounting software expenses, including Bill.com. This will streamline tax preparation and provide support in the event of an audit.

How Fyle Automates Your Expense Categorization and More!

Fyle significantly simplifies the management and tracking of Bill.com expenses, offering businesses enhanced efficiency, control, and valuable insights into their spending on financial operations.

Here's a detailed explanation of how Fyle helps:

1. Automated Expense Tracking: Finance personnel can easily submit Bill.com invoices through Fyle's mobile or web app. Fyle automatically extracts key data from the invoices, minimizing manual data entry and potential errors and accelerating the expense reporting process.
2. Automated Expense Categorization: Fyle's AI can be configured to automatically categorize Bill.com expenses as "Software Expenses" or "Administrative Expenses" based on pre-set rules. This ensures consistent and accurate coding of expenses, saving time and improving accuracy.
3. Seamless Accounting Integration: Similar to how Bill.com integrates with other financial systems, Fyle integrates with popular accounting software (e.g., QuickBooks, Xero) to automatically sync Bill.com expense data. This eliminates the need for manual data transfer, speeds up reconciliation, and enhances overall efficiency.
4. Customizable Approval Workflows: Fyle allows businesses to establish customizable approval workflows for Bill.com expenses. This ensures that expenses are reviewed and approved by the appropriate personnel, granting greater control over spending.
5. Detailed Reporting and Analytics: Fyle provides comprehensive reporting and analytics on Bill.com expenses, delivering valuable insights into spending on financial operations. You can utilize Fyle's reporting capabilities to analyze Bill.com costs in relation to AP/AR processing times or efficiency gains, enabling data-driven decisions on technology investments.
6. Compliance and Audit Trail: Fyle maintains a detailed audit trail of all Bill.com expense transactions, facilitating easy tracking of who submitted, approved, and processed each expense. This aids businesses in ensuring compliance with internal policies and external regulations and simplifies audits.
7. Cost Savings Insights: Accurate expense tracking and analysis within Fyle can help businesses uncover cost-saving opportunities. For example, it can reveal the ROI of Bill.com by quantifying time savings and reduced errors in financial processes. Fyle's reporting features can provide a company with insights into the cost of processing invoices before and after implementing Bill.com, demonstrating the platform's cost-effectiveness.
8. By automating and streamlining the management of Bill.com expenses, Fyle empowers businesses to save time, reduce administrative overhead, and achieve enhanced visibility and control over their financial operations expenditures.

FAQs around Bill.com expense categorization

1. How are expenses related to Bill.com treated for tax purposes?

To be deductible, expenses related to Bill.com, a platform often used for paying bills and invoicing customers, must meet the criteria of being ordinary and necessary. An ordinary expense is one that is common and accepted in your industry, and since many businesses use such services for accounts payable and receivable, it's likely considered ordinary. A necessary expense is one that is helpful and appropriate for your trade or business; if Bill.com facilitates the essential functions of managing your business's finances, it would likely be considered necessary (IRS Publication 535).

2. Are there specific IRS guidelines on deducting expenses for online bill payment services?

The IRS publications don't specifically mention "Bill.com" or other online bill payment services. However, the general rules for deducting business expenses apply. The key factor is whether the expenses are ordinary and necessary for your business operations.

3. What records should I keep for Bill.com expenses?

You should maintain accurate records of your Bill.com expenses, including invoices or statements from Bill.com, bank statements showing payments, and any documentation that shows how the service is used for your business.

4. Where do I deduct Bill.com expenses on my tax return?

Answer:   Where you deduct Bill.com expenses depends on your business structure. If you're a sole proprietor, you'd typically deduct them on Schedule C (Form 1040). Other business structures would deduct them on the appropriate business income tax return.