How To Create An Expense Report to Lower Your Business Tax (with template)
Expense management for business can help you understand where your money goes. You can easily list down what you spend on and get an idea of how much money is put to waste. You can decide to designate your earnings into something more worthwhile or to continue paying things already included on your list. However, tracking business expenses and creating an expense report to reimburse and claim tax deductions can be much more complex. It goes beyond budgeting, reporting, or generating the grand total of expenditures.
What is an expense report?
In business, a simple list of expenses may not be enough. Every small business owner needs an expense report prepared professionally which contains the following details:
- Date when the item was bought
- Vendor from which the item was purchased
- Client for whom the item was bought
- Project for which the item will be used
- Account number
- The author who made the new expense
- Notes may include other details like the condition of the items or services purchased
- The total amount of the entire transaction including tax
You can download this expense report and modify it to your own business needs.
Why do businesses need an expense report?
There are a lot of reasons why businesses need an expense report. Small businesses commonly require an expense report from their employees who usually pay for transactions from their pockets and request for reimbursements later. A broader discussion is as follows:
1. To manage employee expense reimbursements
Employees usually incur expenses when transacting for business purposes. For instance, employees of a restaurant who buy groceries would need to report not only the total amount of the purchase but also the transport cost and other spending entailed with the activity.
An expense report form from several employees would be very difficult to reconcile if they don’t look the same.
A clear and concise expense report should show when, where and what items were involved in the transaction. It should also clearly indicate itemized information made with the transaction. Businesses that use corporate credit cards for purchases can easily generate transaction information through their credit card statements.
2. To track expenses within an accounting period
Most small businesses in Singapore choose to end their accounting period at the end of each financial year which usually falls on December 31. At the end of each year, businesses can analyze their spending and can come up with plans as to which aspect of their operation needs to change or improve in order to reduce costs. Whether you’re a sole proprietor or a partner, you should submit an expense report form on or before the end of the period. This way, you get a higher chance of availing tax deductions and increasing your revenues.
3. To lower tax payments
Preparing an accurate expense report allows for bigger chances of lowering your taxes in Singapore. Business owners should remember that not all costs incurred by the business can be deductible from your tax due. However, there is a huge chance that business-related expenses will decrease your tax payments.
What is an allowable and disallowable business expense?
There are many types of expenses which can be incurred by an organization. However, according to the Inland Revenue of Authority of Singapore (IRS), an allowable business expense is any spending used for running the business and can be considered for tax deduction. On the other hand, a disallowable business expense is expenses not allowed to be deducted against the revenue under the Income Tax Act. The table below shows examples of expenses that are deductible and not deductible from the total tax due. For a complete list, check the IRAS Guide.
Allowable Business Expense vs Disallowable Business Expense
|Allowable Business Expense||Disallowable Business Expense|
|Employee / Staff Costs||Employee / Staff Costs|
|Finance and Professional Costs||Capital Expenses|
|Running Costs||Private Expenses|
|Other Allowable Business Expenses||Other Disallowable Business Expenses|
What are the rules for claiming allowable business expenses?
Not all expenses can be deducted against your business revenue. And not all allowable business expenses can be automatically submitted for deduction against taxes due for payment. Business travel receipts should clearly indicate that these were not spent for the owner’s family or for personal gain.
Here are a few things every business owner should remember when claiming allowable or deductible expenses:
1. Expenses should have been incurred.
This means that the business is already legally liable to pay for the transaction. Accounts payable are allowable expenses since the purchase has been made even when the payment has not been realized by the company.
2. The expenses’ grand total should be related to the operation of the business
And it should not include personal spending business trips. The IRAS may ask for proof as to why the expense is necessary to earn income for your organization and be allowed for tax deductions.
3. Expenses should come with supporting documents
Invoices, receipts, and other financial data stored for the last five years should substantiate the claim.
How to create an expense report?
Creating an expense report should be an indispensable part of any business operation. Here is a step-by-step guide on how to do a business expense report:
Choose a template or software:
Traditional small businesses may still choose to manually create an expense report following the format provided by the accounting department. Expense reports are usually done on an Excel template which is shared among the members of the team. On the other hand, most modern businesses already commissioned Saas providers to automatically consolidate data on the company’s spending.
Customize the template
Whether you’re manually updating the company’s expense sheet or you are already using cloud payments software, it still pays to customize the template according to your business need. Check out if these expense categories are indicated in your expense report:
- Car and truck expenses
- Employee benefit programs
- Office expenses
- Rent or lease
- Repairs and maintenance
- Taxes and licenses
- Travel and meals (business trip)
Itemize the expenses
Enter information into the expense report depending on the item. Make sure that these are entered in chronological order with the previous expenses at the bottom of the form and the latest on the top-most part. Check if the data entered in each type of expense is not a duplicate for every expense category.
Attach receipts and invoices
Receipts, invoices, and other financial documents for old and new expenses are proof that your business is already legally liable to pay off the stated amount. Without these attachments, the IRAS may not honor your claim because there is not enough proof that the expense has already been made. This portion will be much easier if you have been keeping financial data consistently.
A sole proprietor may find it easy to create an expense report template. However, opting for expense report automation can be more accurate and reliable if you’re seeing your trade grow in the next few years. Having the right accounting software to prepare your business expense report allows for more chances to reduce costs because you can detect where you have been spending your income. You can also start automating your business expense report to decrease the taxes imposed by the IRAS against your revenue. Automation could help organize your data while also allowing you to have a more accurate and reliable basis for your annual tax deductions.
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