Accounting

What is the Right Expense Threshold for Requiring Receipts?

Receipts are an easy way to prove the date, amount, and nature of any expense. Yet if employees make many small purchases, keeping receipts can become burdensome for both the employee making the purchase and the employee processing the expense claim. It can also become quite expensive for the business because much employee time will go into processing receipts instead of other tasks.

If you decide to let employees skip receipts for smaller expenses, you’ll need to set a threshold that’s low enough to avoid legal complications but high enough to keep employees from drowning in a sea of paper.

Choosing a receipt threshold: The IRS says $75

There are two primary reasons to require receipts for employee expenses: to confirm that employees really are spending money how and when they claim, and to back up deductions listed on the business’s tax return.

The IRS requires businesses to keep receipts for all business expenses of $75 and up. Note that if your business is audited, you’ll still need to be able to provide basic information about expenses under $75, such as the date of the purchase and its business purpose.

Why businesses would want a threshold of $75:

  • A threshold of $75 makes sense for the purpose of confirming your employees’ spending habits. While it’s true that expense fraud is a real concern — indeed, a 2012 study by ACFE found that expense reimbursement frauds made up 14.5% of all the occupational fraud cases they examined — employers need to strike a middle ground between risk management and overly restrictive expense policies.
  • If you require receipts for expenses $75 and up, you’ll be holding any potential fraud to a low dollar amount. Naturally, if one or more employees start turning in vast numbers of reimbursement claims at just under the $75 limit, you’ll want to closely examine those claims and those employees.
  • Setting the threshold at $75 cuts back on the time your employees will need to spend on processing small expenses, and that can easily end up saving your company far more money than you’d lose from the occasional false expense claim.

Why businesses would want a threshold of less than $75:

  • Very small businesses or businesses that rarely have employee expenses may want to require receipts for every expense since doing so won’t add much of a burden to the employees.
  • The IRS requires receipts for all lodging expenses, even if they come to less than $75 (although that would be pretty unusual).

Why businesses would want a threshold of more than $75:

  • Never! That would put your company out of compliance with the IRS. If you face an audit and are unable to produce receipts for all expenses of $75 and up, the auditor will disallow those deductions, and you could end up with substantial penalties.

Encouraging employee compliance

Once you’ve decided on an expense threshold, you’ll need to find ways to get your employees complying with that policy. It’s especially problematic if they haven’t been required to turn in receipts in the past, since it will likely take your employees some time to get into the habit of always requesting a receipt.

The best way to get employees to start keeping receipts is to make it easy for them. Encourage your employees to use their phones to snap a photo of receipts at the moment they make a purchase. A legible digital image of a receipt qualifies as a receipt with the IRS and should work just as well for your own files. In fact, a snapshot of the receipt can be far more durable than an actual paper receipt, since it won’t fade over time and no one will spill coffee on it.

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Giving your employees a receipt-management app can help further, because not only can they collect receipts with the click of a smartphone, but they’ll also be able to submit those receipts automatically, along with their expense requests. A good app will also send automatic reminders to employees who haven’t yet submitted receipts.

Such apps also make handling digital receipts easier. Many retailers have made the switch from paper to digital receipts to cut costs and save paper; indeed, businesses using the credit card processing system Square send out more than 10 million digital receipts per month. And the volume of digital receipts is likely to keep climbing, so having an easy way for employees to import those receipts can significantly encourage compliance.

Unfortunately, even the most organized employee can slip up now and then and forget to get a receipt. It’s wise to have a policy in place for dealing with lost receipts so that your finance staff isn’t forced to make the big decision on their own authority.

What if an employee forgets a receipt?

You’ll inevitably have situations when an employee will lose or forget to get a receipt and will ask for reimbursement anyway. In that case, you have a few options for dealing with the reimbursement request.

One possibility is to have your employees fill out a receipt-replacement form like this one. Such a form isn’t as good as an actual receipt, but at least it captures all of the pertinent information. Employees who used a debit or credit card to make the purchase in question can also attach a copy of the bank or credit card statement with the specific transaction highlighted.

You also have the option of setting different policies for different purchase amounts. For example, you might accept a receipt-replacement form and a bank statement for purchases of $75–$200 but refuse reimbursement for purchases over $200 without an actual receipt.

Setting a receipt threshold of $75 makes a great deal of sense for most employers. It keeps the company in compliance with IRS requirements while streamlining the expense process for smaller purchases. And if you use technology to make it easy for employees to keep and submit receipts, you’ll cut down on the need for exceptions.