January 14, 2019

Should You Use a Business Credit Card for Personal Expenses?

Before you use a business credit card for personal expenses, read this post to ensure that your business and personal finances won't suffer. Even though there can be benefits, it's important to be aware of potential dangers as well. Arguably, the biggest danger has to do with tax and liability, so we’ll start there.

What to Consider Before Charging Personal Expenses to Your Business Credit Card:

 1. The Structure of Your Company

Limited Liability Companies and Corporations are two company structures that limit the personal liability of small business owners. When an LLC or Corporation is created, a new legal entity is formed, separate from the owners. If you use a business credit card to pay for personal expenses, you don’t honor that separation. By failing to maintain separation between yourself and your company, you expose yourself to being held personally liable for business debts. This happens when a court decides to “pierce the corporate veil.” In other words, if your business fails, and you’ve mixed personal and business funds, the court may decide that business debtors can go after your personal assets.

2. Tax Implications

Business owners can easily run into issues with the IRS when business and personal bank accounts are mixed. In the eyes of the IRS, using a business credit card for personal expenses puts all the money that your business spends via credit card into question. During an audit, the burden of proof is on the business owner to prove the legitimacy of all business credit card transactions. When business and personal expenses are mixed, proving your innocence becomes much more difficult. Even if you aren’t audited, using business credit for personal expenses makes doing taxes even more time-consuming and expensive. That’s because, to ensure you’re only deducting true business expenses, you (or your accountant) will have to review each transaction. Looking through months and months of credit card statements trying to find business expenses such as office supplies can be challenging (especially when you have to sift through personal costs like dinner bills and shopping sprees).

3. Limited Protections Available for Business Credit Card Users

In 2009, the Credit Card Accountability Responsibility and Disclosure act was passed. This credit card act gave consumers protection from certain fees and rate increases. Still, it's important to note that the Card Act of 2009 doesn’t cover business credit card users. That means business credit card issuers can raise rates based on payment history and hike interest rates on existing balances. If you’re paying your bills on-time and in full, you may be able to avoid rate hikes or unexpected fees, but it’s still important to be aware. Due to this, you should be very diligent about reading agreements prior to choosing a new business credit card. Conduct thorough research, and review credit card applications before you submit them.

4. Impact on Your Business and Personal Credit Scores

Many business credit card issuers don't report transactions to personal credit bureaus unless the account is in danger of defaulting. If you’re trying to build your personal credit history, this is a drawback. Of course, you may build a more robust business credit history, but you’ll have to weigh that against the risk of falling behind on payments. If you aren't able to pay off your balance, the interest expense you'll have to pay to credit card companies will mean that any potential benefits of rewards or a strong credit history are quickly wiped away.

5. Amount of Revenue Available to Pay Bills

As mentioned earlier, the interest expense on business credit cards isn't cheap. For example, The Spark Cash for Business card by Capital One carries an APR of 18.24 percent, while the Ink Business Preferred credit card has an APR that ranges from 17.99 to 22.99 percent. Business credit cards that offer more extensive rewards have APRs that are even higher, plus many come with a significant annual fee. If you’re strapped for cash, and you must cover interest expenses for a balance on both business and personal expenses, you could run into financial trouble. That's why you should think before you charge personal costs, as you'll have to pay off a larger balance, which could affect your business's overall finances.

Conclusion: Think Before You Charge

If you ask most accountants or financial advisers, they’d likely tell you to avoid charging personal expenses to a business credit card. That’s because the risks involved typically outweigh the relatively marginal benefits you might receive from generous reward offerings. As with any financial decision, there's no one-size-fits-all solution. Before making any significant moves, consider what’s covered in this post along with your own business needs. If you find that you need more money for your business and personal life, you might benefit from applying for a business loan or card, and then charge personal expenses to a different card. Ultimately, by keeping costs separate, you can save yourself stress later! Editor’s Note: This post was updated for accuracy and comprehensiveness in January 2019.