Should You Put Personal Expenses On A Business Credit Card?
It’s not easy to raise enough capital to get your business off the ground to the point where it can sustain itself. That’s part of why half of all small businesses don’t make it past five years (stat courtesy of the Bureau of Labor Statistics). When building your business starts stretching your personal finances, a question that may arise is: Is it illegal to use a business credit card for personal use?
(Actually, it’s a question we know arises because we can see what people search for on Google)
Now, the more financially astute among you may scoff at the idea that people would think to try this. Well, don’t scoff. Entrepreneurs are feeling the same late-capitalist crunch the rest of us are experiencing and it’s not crazy that small business owners, most of whom are not lawyers or accountants, will look for any hack or “weird trick” they can find to make ends meet while funding their businesses.
We’re going to discuss the merits of charging personal expenses to a business credit card in this article. For more information on the ins and outs of how business credit cards work, check out our piece on characteristics of business credit cards that you may not be aware of.
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Can You Put Personal Expenses On A Business Credit Card?
Well, you can in the sense that nobody will haul you off to jail for doing so. Here are some better questions to ask:
- Should you put personal expenses on a business credit card?
- Is it wise to do so?
- Is it sustainable?
The answer to all three, you’ll be disappointed to hear, is no. For more on why that is, let’s break down what happens when you charge personal expenses to your business credit card.
Pros & Cons Of Using Business Credit Cards For Personal Expenses
One argument occasionally floated in favor of charging personal expenses to a business card is the fact that expenses rung up on your business credit card, in most cases, can’t hurt your personal credit score because most (not all!) business credit cards don’t report to the consumer credit bureaus. By charging an expense to a business card rather than your personal card, your personal credit utilization ratio is unaffected, thus helping your credit score.
Another argument for making personal purchases on your business card is the fact that you can often earn better rewards by charging things to your business card than you could with your personal card, as business credit cards typically have more lucrative rewards programs. Of course, as we'll discuss in the Cons section, if your business credit card issuer finds out that you've done this, your ability to receive rewards can be imperiled. However, if the expense looks like something that could plausibly be business-related, you might be able to get away with it.
Wow, where to start?!
For one thing, mixing business and personal expenses on the same credit card can attract the attention and ire of the IRS. If you're audited, you'll have to have to demonstrate to the satisfaction of the IRS that every expense charged to your business credit card was business-related, and serious penalties can result if you can't prove your innocence. However, let's say you're not too concerned about the IRS. After all, the IRS seems to be focusing its attention on low-income EITC recipients these days (the working class can't afford lobbyists). Sadly, you'll have more to worry about than just the beleaguered IRS.
Let's say your business credit card ledger includes both personal and business charges. Now, let's posit that your business fails. If your personal and business finances are comingled, a court could find you personally liable for your business debts even if your company is an LLC or a corporation. This is known in the biz as "piercing the corporate veil." If your personal finances are hurting to the point where you need to charge personal expenses to your business card to stay afloat, just imagine how much more dire your financial predicament will be if this happens! After all, business creditors are just as persistent as the IRS, and these days, they're better resourced to boot.
Even if you're not audited and your business doesn't fail, mixing personal and business expenses on your business card will make doing your taxes an even more drawn-out and painful process. Every single transaction will need to be reviewed and evaluated to determine whether or not it was a business expense. Talk about a pain in the tuchus!
Another obstacle to using your business credit card to cover personal expenses is the fact that all the major business credit card issuers explicitly forbid it. It's possible your card issuer could close your account if it finds widespread personal use of your business card. And even if that doesn't happen, your rewards and perks could be affected by using your card in this way. For example, if your business card offers auto insurance coverage for all business-related car rentals and you use the card to pay for a rental for personal reasons, your insurance coverage can be downgraded.
What's more, using your business card in this way could prevent you from being able to land a business loan in the future. Business lenders will scrutinize your personal and business credit reports when you apply for a business loan along with your previous year's bank statements, tax returns, and more. If they find evidence in these documents that you've mixed your personal and business finances -- and they likely will -- they will almost certainly deny you the loan.
Need another reason not to mix personal and business expenses on your business card? The consumer protections that the Credit CARD Act of 2009 extends to users of personal credit cards don't apply to business card use.
Mixing Personal & Business Expenses
It gets harder every day for a person who isn't already independently wealthy to launch a successful business while still keeping the rent paid and the kids fed, so I have a hard time summoning up any moral outrage for struggling small business owners looking to catch a break by charging personal expenses to their business credit cards. The most compelling argument against this practice isn't moral but practical.
Simply put, the potential downsides of putting personal expenses on your business credit card far outweigh the upsides. You'll be exposing yourself to IRS penalties, additional tax hassles, and personal liability for your business debts if your business fails. You'll also reduce your own chances of getting a business loan, thus making expansion of your business much more difficult. I understand the temptation and the potential short-term benefits of charging personal expenses to your business card in a pinch. However, it's simply not worth the immense risk if you're a business owner with an eye toward the future.
Financially speaking, it's just not a good idea to mix business with pleasure. As the song goes, you gotta keep 'em separated.
Considering getting a credit card to help fund your business? Check out these helpful resources!