Billable Expenses | Importance & Examples
Are your billable expenses tax deductible? Learn about billable expenses and billable income and the differences between billable vs non-billable expenses.
The importance of tracking expenses with proper expense management is known by most small business owners and freelancers. However, it’s a lot of work to do on your own and the nuances of some expense categories may be lost in the fray. One such category is billable expenses. But what is a billable expense, and why is it important to track them separately from all your other expenses? In this article, we’ll explain in detail the subtleties of billable expenses and how they affect you and your business.
What Is a Billable Expense?
Billable expenses are those taken on your client's behalf that will eventually be charged or passed on to the client or customer. Sometimes referred to as passthrough costs or reimbursable expenses, these expenses are typically ones that your business incurs while providing the goods or services to the client. Everything from travel expenses, project materials, or subcontractor fees can fall under the billable expense category.
For example, as a caterer, you may have a line item for ingredients and raw materials in your invoice. These items will be used to prepare the meal and won’t likely be reused in other jobs. In this scenario, the line item could be considered a billable expense because the client will reimburse you directly for the cost of those ingredients.
So how does one determine if something is, in fact, a billable expense? The answer can vary by company or by circumstance but is typically determined by the nature of the work, the client’s requirements, or the company’s policies. Generally speaking, you can use the following criteria to determine whether an expense can pass through to your client:
- The expense is directly related to the project or job being done for the client.
- The expense is reasonable and necessary for completing the project.
- The expense is not personal or non-business related. (So that movie you bought on Amazon to stream on your flight is not technically a billable expense.)
It's important to ensure that you correctly document and bill all eligible expenses to understand the financial performance later on and make filing taxes easier.
What Is Billable Expense Income?
Where billable expenses are the costs you incur on behalf of the client, billable expense income is the revenue earned by the business by passing those costs to your client. When your reimbursable expense is repaid, the compensation cancels out the corresponding expense. For example, if a graphic designer incurred $500 in billable expenses for a project (such as software licenses, stock photos, and printing costs), and charged those expenses back to the client, then the billable expense income would be $500.
It is important to accurately track the billing expenses and matching payments. Not only does it allow you insight into the associated project costs to optimize them, but it can also help your business identify trends and make informed decisions about budgeting, pricing, and resource allocation. Additionally, billable expense income is often taxed differently than standard revenue.
Are Billable Expenses Tax Deductible?
Generally speaking, billable expenses can be tax deductible. However, it is essential to note that only the portion of the expense directly related to business use can be deducted. There are a few criteria that the IRS requires. The expenses must be both ordinary (common and accepted in the business) and necessary (helpful and appropriate for the business) to be tax deductible. It is also important to keep accurate records and receipts to support any deductions taken.
Tax-deductible billable expenses are reported on your tax return as deductions against your income. The specific forms and instructions for reporting these expenses may vary depending on your business structure.
In the United States, for example, if you are a sole proprietor or single-member LLC, you can report tax-deductible expenses on Schedule C (Form 1040), which is filed with your personal tax return. For larger businesses, tax-deductible expenses are typically reported on a separate business tax return, such as a Form 1120 for corporations or a Form 1065 for partnerships.
It is recommended to consult with a tax professional for specific guidance on tax-deductible expenses.
How Do You Mark a Billable Expense?
Invoicing is one of the simplest ways to mark billable expenses. The invoice ensures that the client is aware of the expenses and that they are included in the final bill. These can and should be discussed and laid out in a contract before work starts.
Additionally, you may want to utilize time-tracking and/or expense-tracking software. They can allow you to categorize time entries or expenses and mark them as billable or non-billable. You can also track them manually in a document or spreadsheet, but you would need to be sure to include dates, descriptions, amounts, and whether each line item is billable or non-billable.
Whether you are keeping up with it manually or with software, there are a few guidelines we would suggest for tracking your billable expenses.
- Keep detailed records
This includes time tracking, invoices, receipts, and any other pertinent information to help categorize, track, and provide backups in case of disputes or audits.
- Separate personal and business expenses
Especially when expenses can easily be mixed up, such as in the case of travel, vehicle expenses, meals, and entertainment, or supplies. We review this point and more in our Bookkeeping Best Practices guide if you want more information on the topic.
- Categorize expenses properly
Recognizing the difference between your billable expenses and general business expenses can ensure generally accurate accounting as well as help to minimize tax liability.
- Regularly review and reconcile
Doing so can ensure accuracy and help identify any discrepancies to catch errors and avoid issues with billing or taxes.
- Configure your workflow accordingly
When determining who should approve billable expenses, consider the situation and the individuals who may be responsible. Create processes for approvals to route to the appropriate manager, whether it be you, an account manager, or another party.
- Consult with a professional.
If you’re unsure about how to properly track billable expenses or simply are lacking in time, it may be time to contact a professional. If you are looking for guidance on billable expenses or any other bookkeeping services, feel free to contact us at Decimal!
Billable Expenses Vs. Non-Billable Expenses
Why did the accountant break up with their significant other?
Because they were a non-billable expense!
Non-billable expenses refer to expenses that won’t be charged directly to clients over the course of completing a project. Common examples of non-billable expenses can include office supplies, rent, utilities, software subscriptions, and salaries for employees who are not directly involved in billable work. Non-billable expenses are an important part of running a business, but they do not generate direct revenue.
An example of a non-billable expense is a monthly subscription fee for project management software. Let's say a graphic design agency uses a project management tool to organize client projects and tasks. The cost of the subscription is a necessary expense for running the business and managing projects, but it is not directly billable to clients. Even though the non-billable expense is related to the work, it is not typically itemized to the client like the billable expenses would be. Therefore, the agency would pay for the subscription using its own funds or from a business account, where billable expenses would be directly reimbursed via the project invoice. The cost would be recorded as a non-billable expense in their accounting records.
Common Mistakes with Billable Expenses
If you’ve ever bought anything online, you are probably familiar with one of the most common billable expenses, shipping & handling. In the case of online shopping, you are immediately responsible for this cost as a customer. However, for you as a business, this cost may be a little less direct, and some billable expenses may become overlooked.
One of the most common mistakes regarding billable expenses is lumping billable expenses with your general expenses. Let’s say you own a video production company. Your job and what you are paid for is your intellectual property or the resulting video. However, if you only charge a flat rate for the video alone, you may lose out on a lot of revenue and have a massive variation in your profitability from project to project. Some projects may need equipment rentals, while others may require air travel, and some others may need a long consultation. Failing to track these expenses and letting them jumble in with the general costs can be a huge financial mistake and result in an unnecessarily higher tax bill.
Other common mistakes include:
Often, but not always, a symptom of the above, underbilling or “revenue leakage,” can occur when client expenses are overlooked.
- Overbilling for expenses.
Markups are perfectly allowable as long as the client agrees prior.
- Mixing up personal and business expenses.
This can be especially easy in a work-from-home situation or travel scenario. Always confirm whether an expense can be categorized as a billable one.
How to Automate Billing and Expense Categorization
If you’re looking to lighten the load of your accounting, accounts payable, and billing tasks, it may be time to automate your accounting processes. Automating your processes with Decimal can significantly reduce errors and workload. By automating tasks, you can eliminate the need for manual data entry, reducing the risk of mistakes caused by human error. This saves you time and allows your team to focus on higher value tasks.
Decimal's accounting services make it easy to manage your bills with just a few clicks and track all expenses with great detail. Instead of spending time processing the financials, our team can handle it for you. This way, you can focus on running your business and outsource the financial operations that take up too much of your team’s time.
You can also check out Decimal’s partner page to find links to software and other services we recommend to get you started.
Have more questions about billable expenses or want to find out more about how to automate your expense reconciliation and categorization with Decimal? Talk with one of our accounting specialists and see how we can help!