Should You Use a Business Credit Card for Personal Expenses?
Should You Use a Business Credit Card for Personal Expenses?
Airline miles, hotel points, low APRs, boosting your personal FICO score – these are all reasons a small business owner might use a business credit card for personal expenses. But a business owner should weigh the benefits against the potential drawbacks, such the ability to separate business vs. personal expenses at tax time.
Why you should avoid using your business card for personal spending
Are you disciplined in your spending habits? Do you reconcile your statements each month and pay off your balance? Do you record all the personal expenses that you charge to your business credit card? If the answer to these questions is yes, then, all well and good. Many people, however, are less regimented and as business expenses escalate, keeping them separate from your personal account becomes more crucial from an accounting perspective.
Here are additional pitfalls of mixing business and personal transactions on a business card.
- Lack of consumer protection for business credit cards. The Credit Card Accountability Responsibility and Disclosure Act passed in 2009 protects consumers from rates and fee increases; however, the law does not apply to business credit card users. Carrying a large balance on your business credit card that is partly a result of personal spending could spell financial trouble if the card issuer raises the rates.
Personal liability. According to Fora Financial, if you mix your personal and business expenses on a business credit card, any protection you think you have over your personal assets might not apply in the event your business fails. By mixing your funds, a court might hold you liable for your business debts, which means that you could have to pay debtors with your personal assets.
Sallie Mullins Thompson is a CPA, financial planner, and tax strategist. According to Thompson, if your business is organized as an LLC, LLP, S corp or corporation, putting personal expenses on your business credit card could decrease the amount of liability you have for personal assets, because a court might consider a personal one in the event of bankruptcy.
“You won’t have the full liability that your organizational structure gives you, and how much liability you have for personal assets could be called into question,” Thompson said.
IRS audits. For tax purposes, you can deduct only genuine business expenses from your filings. Therefore, if you mix business expenses with personal transactions, it will be up to you, your accountant or both of you to determine whether each expense is a personal or business dealing.
In addition, you might be opening yourself up to the risk of an IRS audit, and the auditor might question whether your business deductions are legitimate. Thompson emphasizes how complex an audit can become if a credit card report includes both business and personal expenses.
“The auditors work with the credit card reports to see if the business owner is claiming personal expenses as deductions,” Thompson said. “It would make the audit horrendous because the business owner would have to separate everything out, and the auditors would be questioning every item.”
Damage to your credit rating. If you use your business credit card for business and personal expenses and are diligent about paying off the balance each month, you might build a more robust business credit history. If you fall behind on payments, however, you’ll risk your card issuer reporting transactions to your personal credit bureaus, which could ruin your own credit history and jeopardize your ability to get financing in the future.
Consider also that business credit cards tend to have higher fees, particularly if they offer rewards — and the interest rates can go up at any time with no warning. If you have a balance because you’ve been using the card for business and personal expenses, you could be heading for financial trouble.
How to keep your business and personal finances separate
Keeping your business and personal finances separate saves you time when it comes to paperwork, and organized accounts are crucial for informed business decisions. Here’s how to optimize the accounting process.
- Keep separate credit cards. Here are the more obvious reasons to use a business credit card only for business expenses:
- Taxes: The biggest reason not to charge personal expenses to a business credit card is because you can track things effortlessly. When it comes to tax time, it’s so much easier to have your purchases organized and separate instead of having to backtrack and categorize expenses line by line.
- Tailored rewards: Some cards offer higher rewards for business-specific purchases, such as office supplies. When it comes to rewards, however, it can make sense to mix personal expenses with business. You might use your business card to buy a flight for a personal vacation to take advantage of air miles, which is fine, as long as you back it out of your business credit card expenses.
- Strategic decision making: Most business credit cards provide quarterly or year-end summaries and a custom, itemized report of your spending. These reports provide valuable data for strategy and business decisions. Did you exceed your budget for marketing last year? Was the return worth the expense? It’s imperative to know exactly how much you spent on certain initiatives and the return on investment to decide whether to continue or nix projects.
- Additional financing: A small business credit card can come with special financing. Some issuers provide interest-free financing for a specified period, which might buy your business time to gain traction in its early days.
Keep separate bank accounts. Personal savings are often the source of at least a portion of the initial funding for a business, but a separate bank account for the business is still a good idea for accounting purposes.
Thompson explained that many sole proprietors avoid using a separate bank account for business because they don’t want to pay the higher fees that banks typically charge. In this case, Thompson suggests just opening a regular bank account for the business — it doesn’t have to be a business bank account.
A separate bank account might be a legal issue if the business is an independent legal entity and operates under a DBA — a “doing business as” name. For example, a landscaping business operated by Steven Jakes might have the DBA “Jake’s Landscaping;” it has a separate name from the owner and needs a separately named bank account. This is often the case for sole proprietors and partnerships.
Even without the legal requirements, separating your business bank account from your personal account avoids confusion when it comes to accounting records and tax preparation.
Ultimately, if you mix these bank accounts, you can’t discern your business’ real financial situation, particularly the state of your cash flow. You will need to conduct a line-by-line analysis to get a true financial picture. This is inefficient and costly in terms of time and savvy decision making. If a bank account is strictly for business, the bank statement reflects accurate cash flow data at any point in time.
Organize your filing systems. An organized and separate system for filing or storing personal and business receipts streamlines your accounting process. You should also separately file any expenses and bills for which you can deduct a portion from your tax filings. This is particularly pertinent for home-based businesses. For example, car expenses, internet, phone bills, gas bills and electric bills are all examples of personal expenses, but you can deduct a portion as business expenses from your tax filings.
Many of these types of bills are relegated to the personal stack and forgotten about. “If people have insurance for the business, for example, they often tend to keep all their insurance in one file.” Thompson said.
Thompson listed other examples of documents you should set aside for tax purposes, such as errors and omissions insurance in the case of licenses, property insurance, disability policies that are personal but can be a business expense, business overhead insurance, buy-sell agreements in the case of partnerships and life insurance. The IRS provides guidelines for deducting home-office and business expenses.
What you should do if you use your business card for personal spending
If you’ve used your business credit card for personal spending, the first thing to do is to go back and manually separate things out. “This helps you to come up with a dollar amount for personal expenses that you have put on your card,” Thompson said.
If you use Quicken for your personal and business expenses, which many people do, the software might be able to pull out a separate business report using the categories that you assigned.
Some software can manage and categorize your credit card transactions as they occur. Tallie, for example, automatically codes corporate card transactions and can export them to QuickBooks and other accounting systems.
Going forward, separate your financial transactions both for credit cards and bank accounts to establish organized and separate accounting systems for personal and business expenses.
“I use QuickBooks for my business, and I use Quicken for my personal credit card,” Thompson said. “Then I download my transactions in Quicken and QuickBooks and allocate them to the categories that I need.”
The advantage of this process it that data is ready when it comes to tax time. For example, say you’re considering taking out a line of credit or you want to hire an employee. You can make a much more informed business decision if your inputs, outputs and overall cash flow are clear.
The bottom line
A few extra air miles are tempting, but they’re inconsequential when you consider the risk and hassle associated with commingled accounts. Separate credit cards, a separate bank account and an efficient filing system will make tax time so much easier that you might not need that vacation after all.