With inflation still prevalent, those nickels and dimes, or $5 and $10 expenses, may not seem so important. But they can add up. Just $10 a month is the equivalent of a $120 a year, which could purchase a mid-level inkjet printer, a meal for 2 at a nice restaurant, and so on. Not so long ago (and maybe still in some companies), there was a petty cash box that could be tapped by authorized employees to pay for little things…a tip for a delivery person, pizza for staff, etc. Maybe the box had $50 or $500.
Today, most expenses—no matter how small—are paid by plastic or electronic transfers. Whatever the payment method, all little expenses need to be tracked so they can be properly entered on your books and records and deducted at tax time.
Handling small expenses
Things don’t happen automatically; there’s planning involved for everything, including those little expenses. Who pays for what in your business? Do you allow/require employees to pay for certain business expenses for which they’re reimbursed (discussed later)? Do they buy items for the business using company accounts or credit cards?
Decide how to handle little expenses:
- Designate who decides what’s needed
- Designate who makes purchases
- Decide how purchases are paid for
Create systems to track and manage little expenses:
- Budget for small expenses
- Enter expenses in accounting software/online
- Collect/store receipts. Scanning receipts eliminates paper clutter.
Cash box best practices
If you use a cash box, be sure it includes a transaction log on which “withdrawals” are entered—the date, amount, and purpose for each expense; keep receipts where possible. You also want the name of the person who’s tapping into the cash. It may seem troublesome to provide so much detail for a minor expense, such as a $5 tip, but it’s necessary for the business’ financial and tax records.
Also set policy on where to keep the cash box, who has access to the key to the box, how much to keep in the box, and who is responsible for replenishing it. Clearly, the amount depends on what’s customarily used for a week or a month—the time you set for refilling the cash box.
If you have an “accountable plan” for reimbursing expenses—no matter how seemingly trivial—the reimbursements aren’t taxable wages to employees; they aren’t reported on W-2s or subject to employment taxes. The business can deduct the expenses to the extent allowed by tax law.
To be an accountable plan, as explained in Chapter 6 of IRS Publication 463, 3 conditions must be met:
- Expenses reimbursed under the plan must have a business connection, a condition that is usually easily satisfied.
- Employees must adequately account to the company for expenses within a reasonable time. This usually means within 60 days after the expenses were paid or incurred. Accounting means providing the company with proper documentation of expenses (e.g., an expense account form or other statement—on paper, through a computer, or via a mobile device).
- Employees must return to the company any excess reimbursement or allowance within a reasonable time. Generally, this is within 120 days after the expenses was paid or incurred. Advances usually can’t be made more than 30 days before the time of the expenses.
Author Arthur Conan Doyle said “It has long been an axiom of mine that the little things are infinitely the most important.”
When it comes to expenses, having good business practices in place for the little things will carry over to bigger things and help the business stay on top of its money.