What expense category is Vanta Expenses?

In an increasingly digital and regulated world, maintaining robust security and achieving compliance certifications (like SOC 2, ISO 27001, GDPR, HIPAA) is no longer a luxury but a necessity for many businesses. Platforms like Vanta help companies automate these complex processes. For accountants and Small to Medium-sized Business (SMB) owners, the costs associated with such services are important business expenditures that need correct classification for financial accuracy and tax purposes.

This guide will discuss how Vanta expenses are typically categorized, key considerations for their classification, examples of these costs, their tax implications under IRS guidelines, and how Fyle can assist in streamlining the tracking of these critical operational expenses.

Vanta Expenses Category

Vanta provides a security and compliance automation platform, typically offered as a Software as a Service (SaaS) subscription. Expenses related to using Vanta are generally considered operating expenses essential for maintaining a business's security posture, meeting regulatory requirements, and building trust with customers.

For accounting and tax purposes, Vanta subscription fees and related costs usually fall into categories such as:

• Software Subscriptions or Software Licenses: This is a common and direct classification for SaaS platform fees.
• Compliance Costs or Regulatory Expenses: This category reflects the primary purpose of Vanta, helping businesses achieve and maintain compliance with various security standards.
• Professional Fees or Consulting Fees: If Vanta's services include significant, separately billed consulting, audit assistance, or readiness assessments, those components might be classified here.
• General and Administrative Expenses: These services support overall business operations, risk management, and governance.

The overarching principle is that these costs must be "ordinary and necessary" for conducting your trade or business, especially for companies that handle sensitive data or need to demonstrate compliance to their clients.

Some Important Considerations While Classifying Vanta Expenses

Subscription Model

Vanta is typically offered as a subscription (monthly or annual). These recurring fees are generally treated as operating expenses and deducted as they are paid or incurred, aligning with the service period. This is distinct from one-time purchases of perpetual software licenses, which might be capitalized and amortized.

Bundled Services

Vanta may offer various service tiers or modules (e.g., platform access, automated monitoring, policy templates, integrations).

• If costs are bundled into a single subscription fee, the primary service (security and compliance automation software) usually dictates the classification.
• If there are significant, separately itemized fees for distinct services like direct audit assistance or extensive consulting, these might be broken out and classified as "Professional Fees."

Implementation or Setup Fees

Any one-time setup or implementation fees associated with Vanta are typically expensed in the period incurred, especially for a cloud-based subscription service.

Business Need and Industry Standards

The necessity of a tool like Vanta is often dictated by industry standards, client requirements (e.g., needing a SOC 2 report to do business), or regulatory obligations (e.g., HIPAA for healthcare-related businesses). This reinforces its status as an ordinary and necessary expense.

Recordkeeping

It's crucial to maintain all documentation related to Vanta expenses. This includes:

• Subscription agreements outlining the services, term, and cost.
• Invoices from Vanta.
• Proof of payment (e.g., credit card statements, bank transfer records). These records are essential for tax purposes to substantiate the expense.

Examples of Vanta Expenses

Expenses related to using the Vanta platform typically include:

• Recurring monthly or annual subscription fees for access to the Vanta security and compliance automation platform.
• Fees for specific compliance framework modules selected by the business (e.g., SOC 2, ISO 27001, GDPR, HIPAA, PCI DSS).
• Charges for add-on features or higher service tiers that might include more extensive automated monitoring, a larger number of integrations, or premium support.
• If applicable and separately billed by Vanta or a Vanta-referred partner:
  
  • Costs for readiness assessments.
  • Fees for facilitated penetration testing (though often this is a separate vendor).
  • Support fees related to audit preparation.

Tax Implications of Vanta Expenses

Deductibility

Subscription fees and related costs for compliance automation software like Vanta, used for legitimate business purposes to meet security and regulatory obligations, are generally deductible as ordinary and necessary business expenses under IRC Section 162.

Timing of Deduction

Cash Method: Businesses using the cash method of accounting typically deduct Vanta expenses in the tax year they are paid. For annual subscriptions paid upfront, the "12-month rule" may allow the full deduction in the year of payment if the benefit does not extend more than 12 months beyond the first date the business receives the benefit or beyond the end of the next tax year.

Accrual Method: Businesses using the accrual method generally deduct the expense over the subscription period to which it applies, as the service is made available or consumed.

Not Capitalized Software Development

Subscribing to Vanta is different from incurring costs to develop custom compliance software internally. Internal software development costs for tax years beginning after 2021 are considered research and experimental expenditures that must be capitalized and amortized over 5 years (or 15 years for foreign research). Vanta subscription fees are for the use of an existing service.

Sales Tax

If sales tax is applicable and charged on Vanta subscription fees, this tax becomes part of the total deductible expense.

Recordkeeping for Tax Purposes

Businesses must maintain adequate records, such as subscription agreements, invoices detailing the services provided, and proof of payment, to substantiate the claimed deductions in case of an IRS audit.

How Fyle Can Automate Expense Tracking for Vanta Expenses

Effectively managing SaaS subscriptions like Vanta, including tracking payments, managing invoices, and ensuring proper categorization, is critical. Fyle’s expense management platform can significantly streamline this.

Automated Capture of Subscription Payments

• Real-Time Credit Card Feeds: If Vanta subscriptions are paid using a corporate credit card linked to Fyle, the transaction details are captured automatically and in real-time, providing immediate records.
• Invoice Management: Digital invoices from Vanta can be easily forwarded from emails (like Gmail or Outlook) or uploaded directly into Fyle, where they can be automatically attached to the corresponding transactions.

Recurring Expense Management

Fyle helps track and manage recurring subscription payments for services like Vanta, making it easier to budget for these ongoing compliance and security costs.

Accurate Categorization & GL Sync

• Vanta expenses can be consistently categorized within Fyle (e.g., "Software Subscriptions," "Compliance Costs," "Security Services") for precise financial reporting.
• Fyle’s deep, two-way integrations with major accounting software (QuickBooks Online & Desktop, Xero, NetSuite, Sage Intacct) ensure that these categorized expenses are accurately exported to the general ledger.

Approval Workflows

For new compliance tool subscriptions or significant changes in service tiers, Fyle’s customizable approval workflows can ensure that these expenditures are reviewed and authorized according to company policy before payment or reconciliation.

Spend Visibility and Budget Control

Fyle’s dashboards and analytics give businesses clear visibility into their spending on compliance tools and other SaaS subscriptions. This aids in managing IT and security budgets, tracking vendor expenses, and identifying any underutilized services.

Departmental or Project Allocation

If particular departments or projects drive the need for Vanta or specific compliance modules, Fyle can facilitate the internal allocation of these costs for more detailed financial analysis.

By leveraging Fyle to manage expenses for services like Vanta, businesses can ensure meticulous recordkeeping, improve the accuracy of financial data, streamline compliance with internal policies, and maintain a clear audit trail for all compliance-related software expenditures.