How do I document expenses I buy on a client's behalf for rebilling?

Why mark a rebillable cost when you buy it?

A receipt filed with ordinary expenses is easily missed at invoicing, and the client, the job and the client's say-so are hard to prove later. IRS Publication 583 warns that you may forget expenses when you prepare your tax return unless you record them when they occur. Capture these with the document when you buy:

• Client and job. Record the client's name and your job, engagement or project code.
• Authority. Note the contract clause, approved estimate or written approval that covers it.
• Charging basis. Note whether you will charge it at cost, with an agreed addition or at an agreed rate.
• Buyer. Name who made the purchase, if it was not you.

Enter it in the books promptly, with the client and job on the entry, in an account used only for rebillable costs; whether that account is an expense or an asset depends on the treatment, below. If card or bank transactions are imported into your books, the imported line is that entry: code it to the rebillable account with the client, job and document number, or match it to the entry you already made, never both.

What must the vendor document show?

For your books, IRS Publication 583 says documents for expenses, which it defines as costs other than the cost of inventory, should show the amount paid and that it was for a business expense; for inventory, any item you buy and resell to customers, they should show the amount paid and that it was for inventory. Which category a rebilled item falls in is for whoever prepares your return to decide. Publication 583 adds that proof of payment, by itself, does not establish that you are entitled to a tax deduction, and that you should also keep documents such as credit card sales slips and invoices to show that you incurred the cost.

The same document is the client's evidence of what was bought for them. AccountingTools' definition of a source document says one captures the key information about a transaction, such as the names of the parties involved, the amounts paid, the date and the substance of the transaction. Keep the itemized receipt or invoice, not just the card statement line, and ask the vendor to add your job reference or the client's delivery address where it can.

Keep the paper originals until your scanning system qualifies. Publication 583 says originals may be destroyed only once the electronic storage system has been tested to show it reproduces them in compliance with IRS requirements, detailed in Revenue Procedure 97-22, and procedures are in place to keep it compliant. It adds that a system short of those requirements may bring penalties unless you keep the originals in a way that lets you and the IRS determine your correct tax.

How do you tie the cost to one client and job?

Attribution kept in someone's memory or a chat thread does not survive time or staff changes. Put it where the document goes, in this order:

1. Give each rebillable document a number, or use the vendor's invoice number.
2. Write the client and job code on the document itself, and in the scan's file name if you scan it.
3. Enter the same client and job on the book entry, in its customer, job or project field or otherwise in the memo, with the document number in the memo.

The test: from any rebillable entry, you can name the client, the job and the document without asking anyone. Job costing is a separate question.

What counts as the client's authority to incur the cost?

Each form of authority needs its own evidence:

This is how far to rely on each in your file, not what the client must pay; when a cost falls outside what you hold, get specific written approval before you buy.

When a client approves by phone or in person, message them at once what you will buy, for which job, the expected amount, how it will be charged and when they approved, and ask them to confirm. File their reply with the vendor document. If no reply comes, your sent message is your own record of the approval, not the client's; for a purchase you could not afford to absorb, get the reply before you buy.

Which treatment applies: gross or net?

If your financial statements follow U.S. GAAP, the FASB's revenue standard, Topic 606, decides. The FASB's Accounting Standards Update 2016-08 says that when another party is involved in providing goods or services to a customer, a business must determine whether it provides the specified good or service itself, as principal, or arranges for the other party to provide it, as agent. A principal recognizes revenue in the gross amount of consideration, so the whole rebill is income and the purchase a cost; an agent recognizes revenue in the amount of any fee or commission, so only the fee is income.

The update says a business is a principal if it controls the specified good or service before it is transferred to the customer, and that one contract can make it a principal for some specified goods or services and an agent for others, so decide it for each distinct good or service you rebill, not once per client. The update says a principal obtains control of a good from another party that it then transfers to the client, of a right to direct that party to serve the client on its behalf, or of a good or service it combines with others to provide what the client contracted for. Its indicators of control include that the business is primarily responsible for fulfilling the promise, which typically includes responsibility for the item's acceptability; has inventory risk before the item passes to the client, as when it obtains, or commits to obtain, the item before having a contract with the client, or after, as when the client has a right of return; and has discretion in establishing the price the client pays. The update adds that an agent can have discretion in establishing prices in some cases, so a handling fee does not by itself make you a principal, and that the indicators should not be considered a checklist. The client's approval of a purchase, which every rebill needs, does not make you an agent either.

For net treatment, keep the contract or engagement terms showing that the indicators point that way: the vendor, not you, answers to the client for the item, it is never at your risk, and the client pays the vendor's price, not one you set. These terms do not make an item a pass-through if you build it into your own work or can direct its provider to serve the client on your behalf; the update treats that as control, so record it gross. Treating a recovery as never income when you in fact control what you bought understates both income and costs. If your books are kept on the cash or tax basis rather than under U.S. GAAP, settle the treatment with whoever prepares your statements or return; the records below serve either.

What does the trail look like from receipt to payment?

This worked example uses invented figures on the accrual basis. You buy 800.00 of signage for client Harbor Dental, job HD-24, on the business credit card; the receipt becomes document R-117. The contract lets you recharge outside purchases with an agreed handling fee, 40.00 here. Invoice 2051 bills "Signage, R-117" at 800.00 on line 2 and the fee on line 3, and the client pays 840.00.

If you control the signage (gross):

Income shows 840.00 and costs 800.00.

If you arranged it as a pure pass-through (net):

Income shows only the 40.00 fee, and Client costs recoverable returns to zero.

When you bill a cost, add the invoice number and line to its entry's memo and to the document or its scan name, such as "billed 2051/2", so the link runs both ways. Each month, list the rebillable entries with no invoice reference, under either treatment: each is a cost not yet billed. On the cash basis under net treatment, Client costs recoverable also holds costs billed but not yet paid, so check it by invoice reference, not by balance.

If you keep cash-basis books and use one of these treatments, record the purchase as above but not the invoice as income; income arrives with the payment. Under gross treatment the 840.00 then reaches income, the 800.00 cost already being in expenses; under net treatment the payment clears 800.00 from Client costs recoverable and 40.00 is fee income. Each amount reaches income or costs once.

How do you document a difference between what you paid and what you charged?

A charge that differs from the receipt invites a dispute, so the file shows how one became the other:

A one-line reconciliation on the file, such as "R-117 800.00 plus handling fee under clause 7, 40.00, billed 840.00", makes the difference explicit instead of burying it in the total.

What backup goes to the client, and what stays in your file?

Send the client these items:

• The document number and the invoice line it supports
• The authority reference, such as the clause, estimate number or approval date
• For a charge at cost or with an addition, a copy of the vendor document or the pages covering their purchase, and the calculation of any addition
• For a charge under an agreed rate or schedule, the rate or schedule reference, the item and the quantity, with the vendor document only if the contract requires it, since it shows what you paid

On any copy you send, black out what does not concern the charge: card and bank account numbers, items on a shared receipt that belong to another client or your business, and staff notes or pricing workpapers. Keep the original unaltered and never change a figure.

What do staff and subcontractors need to capture?

When someone else buys, the handoff is where attribution and authority get lost. The buyer photographs the itemized receipt at the counter, records with it the client, job, charging basis and who authorized the purchase, and sends them to whoever keeps the books within a set time, with any paper original to follow. A subcontractor buying for your job passes the cost on its own invoice to you, citing your job reference and attaching copies of the vendor documents. Its invoice is your source document and takes your document number; the vendor documents are backup, and any difference between them is reconciled on the file like any other charge. How an employee is repaid under an accountable plan, and how a non-employee's travel costs are repaid, are separate questions.

What do you keep when a rebill is disputed, reduced or never paid?

Add these to the original trail, each tied to the document number and invoice line:

The entries below follow AccountingTools' definition of a sales allowance, a price reduction often used to resolve disputes, and its article on writing off a bad debt, which says the direct write-off method does not comply with the matching principle under GAAP and the provision method does, and that the provision method is widely used by companies that follow GAAP and the direct method often by small businesses or for tax purposes.

In the example, on the accrual basis, suppose you agree to take 100.00 off line 2 and the client pays 740.00, or instead nothing is ever paid:

With the reduction under gross treatment, income is 740.00 against the 800.00 cost, a 60.00 loss. Under net treatment the same credit memo reduces accounts receivable by 100.00, but that 100.00 never reached income; which account takes it is for whoever prepares your statements to settle, and the loss is 60.00 either way. Unpaid, the loss under either treatment is the 800.00 you spent. Under the provision method the loss reaches income when you record the estimate; the write-off only removes the invoice from accounts receivable and the allowance. If the invoice carried sales tax, AccountingTools' bad-debt article notes that a write-off may also need a debit to sales taxes payable; whether yours does is a sales-tax question, answered separately.

On the cash basis the invoice never reached income, so a reduction or an unpaid rebill takes no sales-allowance or bad-debt entry: reduce or close the open invoice with a credit memo citing R-117 and the reason. Under gross treatment the 800.00 is already in costs, so the loss already shows; under net treatment, what the client does not pay stays in Client costs recoverable until you clear it, classified as your preparer decides.

AccountingTools' bad-debt article says write-offs made before collection efforts are complete require approval and documentation, since they can conceal billing errors, weak collection practices, unauthorized concessions or fraud. Where someone other than the owner bills clients or handles their payments, the owner approves every reduction and write-off, and whoever prepared it does not. A diverted client payment never reaches your bank, so before approving, the owner contacts the client using contact details from the signed contract or given in person, never ones the preparer supplies, entered in the books or sent in the dispute's messages, and asks what it owes, whether and how it paid, including where it sent the money, and what reduction it agreed. The owner then looks for that payment in the bank and any payment-processor account through the owner's own login, and each month reviews every credit memo and write-off in the books the same way against the approvals given. If the client says it paid and the money is not there, ask the client at once to have its bank trace or recall the payment, and write nothing off. In a one-person business, your written reason and collection record are the file.

How long do you keep the trail?

File the whole trail together under the job or invoice, so one retrieval produces it. The IRS page on how long to keep records says you generally must keep records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that return runs out: the period in which you can amend the return to claim a credit or refund, or the IRS can assess additional tax. Its periods for income tax returns run from when the return was filed unless it says otherwise, and a return filed before the due date counts as filed on the due date:

Where more than one applies, keep the trail for the longest.