How to Create an Expense Policy for Your Small Business

To create an expense policy, write down five things: which business costs the company pays for, how much it will pay, what proof is needed, who approves each kind of spending, and how long records are kept. Keep it short enough that people read it, give examples, and apply it the same way to everyone, owners included.

Billed publishes this page. The US recordkeeping rules below are quoted from IRS Publication 463 (2025), Travel, Gift, and Car Expenses, and the IRS page "How long should I keep records?", both opened on October 29, 2026. The spending limits in the example are sample choices for illustration, not recommendations. This is general information, not tax or legal advice; ask your accountant how the rules apply to your business.

1. State the purpose

Start with one or two sentences on what the policy is for, such as "The business pays for reasonable costs that are needed to do the work and serve clients." When a case isn't covered by the list, that sentence is the test.

2. List what's covered and what isn't

Give examples on both sides, using the same categories as your books. See business expense categories and what is bookkeeping.

• Covered (examples): travel for work, meals with clients (with who attended and why), software and equipment needed for the job, and training tied to the role.
• Not covered (examples): personal purchases, fines and penalties, and upgrades or extras that weren't approved in advance.

Driving a personal car for work needs its own rules and records; see how to track mileage for business. If you keep cash on hand, set rules for it too; see petty cash management.

3. Set spending limits and approval tiers

Decide who can approve how much, and when approval is needed before the money is spent. Put the limits in dollars, so there's no doubt. For larger purchases, such as annual software or equipment, require approval in advance and plan them into your cash flow.

4. Require receipts and set deadlines

IRS Publication 463 (US) says documentary evidence "will ordinarily be considered adequate if it shows the amount, date, place, and essential character of the expense." It lists exceptions where documentary evidence isn't needed, including: "Your expense, other than lodging, is less than $75." Your policy can still require a receipt for every expense, which keeps records consistent.

Set a deadline for submitting expenses, for example within a set number of days and before month-end close. If you reimburse employees, the IRS reasonable-period rules for accountable plans apply; see the guide to reimbursement policies.

5. Say how long records are kept

The IRS page How long should I keep records? (US, last reviewed or updated June 30, 2026) says: "Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out." It also says to "Keep records for 3 years" unless one of the situations it numbers (4), (5) and (6) applies to you. Those other situations can mean keeping records longer, so ask your accountant which period applies to you, and store receipts where the whole team can find them; see how to organize business files.

6. Explain exceptions and what happens when the policy is broken

Say how to ask for an exception and who decides. Say what happens if someone breaks the policy, starting with a conversation for a first mistake. Treat everyone the same way. If you keep granting the same exception, change the policy instead.

7. Publish it and review it

Put the policy where everyone can find it, go through it with new hires, and review it once a year. A written process helps here; see how to create standard operating procedures. For the tax side, see small business tax tips.

Worked example: applying a sample policy

The business, limits and figures here are a sample, invented for this example. A five-person studio writes these rules into its policy:

• Purchases up to $250 need a manager's approval.
• Purchases over $250 and up to $1,000 need the owner's approval.
• Purchases over $1,000 need the owner's approval before they're made.
• Client meals are covered up to $40 per person.

In one month, three claims come in:

1. Software subscription, $90. Under $250, so a manager approves it. Reimbursed: $90.
2. Client dinner for 4 people, $180. The cap is 4 × $40 = $160. The policy pays $160, and the other $180 − $160 = $20 is the employee's own cost. Reimbursed: $160.
3. Laptop, $1,250. Over $1,000, so it needed the owner's approval in advance, which the employee got before buying. Reimbursed: $1,250.

Total reimbursed: $90 + $160 + $1,250 = $1,500. Because each limit was in the policy in dollars, every decision followed from the rules without a debate.

Where Billed fits

Billed's expense and receipt tracking page says to "Give every expense a category so your spending is already sorted when you file taxes or hand the year to your accountant," and that "Billed's expense report can group your expenses by category." It also says an expense records "who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." Billed's mobile app page says you can "Snap a photo of a receipt and attach it to a client or project." For more on keeping expense records, see expense tracking for small business.

When this guide isn't for you

This page covers expense policies for small businesses. If you run a corporate card program at scale, operate in several countries, or are in an industry with its own rules on gifts and entertainment, work with an accountant or lawyer on the specific rules.

Related Articles

• Guide to Employee Reimbursement Policies
• Business Expense Categories
• How to Track Mileage for Business
• Expense Tracking for Small Business
• How to Create Standard Operating Procedures

Frequently Asked Questions

What should a small business expense policy include?

Its purpose, which costs are covered and which aren't, spending limits and who approves them, what proof is needed, the deadline for submitting expenses, how long records are kept, and how exceptions and breaches are handled.

Do I need receipts for every business expense?

In the US, IRS Publication 463 lists exceptions where documentary evidence isn't needed, including an expense, other than lodging, of less than $75. Your policy can still require a receipt for every expense so your records stay consistent.

How long should I keep expense records?

The IRS's general rule is to keep the records behind each tax return until that return's period of limitations runs out, and it says to keep records for 3 years if certain other situations don't apply to you. Ask your accountant which period applies to your business.

How do I set spending limits?

Decide who can approve how much, write the limits in dollars, and require approval before larger purchases are made. In the sample studio, a manager approves up to $250, the owner approves up to $1,000, and anything over $1,000 needs the owner's approval in advance.

When should I update an expense policy?

Review it once a year, and sooner if the same question or exception keeps coming up. A rule that keeps being broken or overridden is a sign the policy needs changing.