Businesses regularly incur costs on behalf of their clients, which they later bill for.
For instance, a marketing agency might buy a software subscription for a campaign they’re running for a particular client, and wish to pass that cost directly on to the customer.
This needs to be treated as income (much like the cost of the subscription should be treated as an expense), but it must be categorized carefully and correctly, in this case, as billable expense income.
In this article, we’ll detail what billable expense income is, how billable expenses differ from non-billable expenses, and when and how to charge clients for billable costs.
What is billable expense income?
Billable expense income is the revenue your business earns as reimbursement from clients for costs incurred on their behalf.
Common examples include travel, software subscriptions, or third-party services purchased to complete a project. For example, a construction firm may need to travel outside of town to collect materials for a client, and those travel costs could be passed on as billable expenses.
Instead of being absorbed as a business cost, billable expenses are passed directly to the client, ensuring the company is properly compensated for out-of-pocket spending.
It’s important to note that this type of income is distinct from regular service revenue, though it may be related.
While standard income comes from the core products or services a business delivers, billable expense income represents the recovery of specific client-related costs that were incurred in order to provide those products or services.
Treating the two separately helps businesses maintain accurate financial reporting and avoid inflating their true operating revenue.
Effective management of billable expense income can have a significant impact on business performance, helping to:
- Ensure expenses aren’t eating into profit margins
- Provide better visibility into project-level profitability
- Strengthen cash flow by recovering money that would otherwise reduce working capital
Billable vs. non-billable expenses
Distinguishing between billable and non-billable expenses is critical in helping invoice clients correctly and maintaining accurate records.
Billable expenses are costs a business incurs on behalf of a client that can be invoiced and reimbursed.
These costs are tied directly to client projects and are recoverable through billing. Common examples include travel for client meetings, contractor fees, and specialized software.
Non-billable expenses are those that cannot be charged back to a client.
They represent the normal cost of running a business and are absorbed as overhead. Examples include rent, salaries, utilities, and general office supplies.
Accurate categorization is essential for financial clarity. Misclassifying non-billable costs as billable can overstate revenue and create client disputes, while failing to mark billable costs correctly can erode profit margins.
When to charge clients for billable expenses
The litmus test for determining whether or not to bill for a given expense is fairly simple. Ask:
Is this expense directly tied to the client’s project?
For instance, the purchase of general equipment to complete a job likely isn’t billable, especially if you keep it after the project for use on other client work. But buying specialized equipment required for delivery might be, provided it's stipulated in your client contract.
Here are a few important guidelines on charging clients for billable expenses.
Establish expense agreements upfront
Setting clear expectations with clients at the beginning of the engagement is the most important step, making it clear which expenses will be billed for.
Itemize expenses separately on invoices
Always be sure to list out billable expenses separately from service fees. It will make invoices easier to read and give clients better visibility into costs.
Provide receipts and documentation
Attaching supporting records for each expense wherever possible.
This will help build trust and transparency, reducing the likelihood of payment disputes or delays.
Apply consistent categorization
Use consistent coding in your accounting system to distinguish billable from non-billable expenses. This will help improve reporting accuracy and support client payment reconciliation.
Follow pre-approval requirements
In many cases, client contracts include provisions regarding expense approval.
Where this is the case, make sure to secure written approval before incurring these expenses to remain compliant and prevent disputes.
Respect client reimbursement limits
It’s not uncommon to cap reimbursable costs or exclude certain categories altogether. Review contracts carefully and track limits to avoid billing clients beyond what has been authorized.
Invoice expenses promptly
Include billable expenses in the next invoice cycle rather than holding them over.
Invoicing early for expenses helps improve cash flow and avoids confusion down the track about when or why costs were incurred.
Examples of billable expense income
What qualifies as billable expense income naturally depends on your industry, product or services, and individual client agreements.
That said, these are some of the most common kinds of billable expense income categories:
- Travel expenses: When employees travel for client work, costs like flights, accommodation, taxis, and meals can often be billed back to the client.
- Subcontractor or consultant fees: If a project requires third-party expertise, the fees paid to consultants or subcontractors can typically be passed on to the client as billable expenses.
- Project materials and supplies: In many cases, specialized materials, parts, or equipment that are purchased specifically for a client’s project are billable.
- Software or licensing costs: If temporary access to specific software or licenses is required for a client’s project, the expense can be charged to them.
- Shipping and delivery charges: Any shipping, delivery, or courier fees incurred to send project-related materials, products, or prototypes to a client are commonly billed.
- Client-related entertainment: In certain industries, client entertainment costs like meals or event tickets can be reimbursable, provided this is agreed upon in advance and is compliant with the client contract.
Billable expenses vs sales of product income
To maintain accurate records and improve financial visibility, it's important to accurately distinguish between billable expense income and sales of product income.
Here’s a quick guide on the major differences between the two.
Nature of the income
Billable expense income represents reimbursement for costs incurred on a client’s behalf. Sales of product income comes from selling goods to customers.
Timing of recognition
Billable expense income is recognized once the client has been invoiced for reimbursable costs. Product sales are recognized when the goods are sold and delivered.
Impact on profitability
Billable expenses income ensures that out-of-pocket costs don’t erode margins, but it doesn’t directly add to profitability.
Product sales income does directly contribute to a company’s gross profit.
Reporting differences
On financial statements, billable expenses are typically shown separately or offset against expenses to prevent inflating revenue.
Product sales income appears as part of operating revenue and is included in gross sales figures.
Tax implications of billable expense income
Billable expense income is treated as income from a tax standpoint, but it's important to understand the intricacies of managing both expense and expense income in tax reporting.
Here are answers to three common questions about the tax implications of billable expense income.
1. Are billable expenses tax-deductible?
Yes, billable expenses are generally deductible as business expenses because they represent costs that are incurred while delivering client work.
However, since they are later billed to the client, the payment received for this expense reimbursement must be recognized as revenue, meaning billable expenses don’t reduce overall taxable income.
2. How do you report billable expense income on tax returns?
Billable expense income should be separate and reported separately from regular business income to avoid revenue misstatements.
Many accounting systems allow you to record the reimbursement as income while simultaneously showing the original expense, ensuring that the two journal entries are balanced out correctly.
This treatment provides clarity for both tax reporting and financial analysis.
3. What are the tax benefits of accurately tracking billable expenses?
Keeping detailed records of your billable expenses (as well as their corresponding reimbursements) helps you reduce the risk of misreporting your company’s income for the period.
Accurate tracking prevents double-counting and makes sure that your tax liabilities reflect the company’s true earnings.
It also supports deductions for expenses that are not reimbursed, strengthening overall tax efficiency.
How to track billable expense income efficiently
For many companies, keeping on top of billable expense income can be a major task that comes with a high degree of administrative burden.
The best move is to build an efficient system for tracking billable expenses and income from client reimbursements.
Steps to implement a tracking system
- Define your expense categories. Clearly separate billable from non-billable expenses in your accounting system so it's easy to find what you’re looking for when you need it.
- Train your staff. Make sure that everyone who is responsible for recording expenses understands the rules for what qualifies as billable and how to document it so that it does, in fact, get billed.
- Require supporting documentation. Make it a policy to collect receipts and records for each expense, which will support both client invoicing and tax reporting.
- Automate flagging and linking. Set up your accounting software to flag billable expenses and connect them to specific client projects.
- Review and reconcile regularly. Lastly, schedule and conduct periodic checks to confirm that expenses are correctly categorized, invoiced, and reimbursed.
Software for tracking billable expense income
Financial operations platforms like BILL make it easier to capture and manage billable expenses.
For instance, BILL Spend & Expense is packed with features like:
- Receipt scanning for easy digitization
- Automated expense categorization
- Integration with your accounting platform of choice
- Dedicated revenue and expense reporting
