Is it illegal to use a business credit card for personal expenses?

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Business credit cards are great tools for dealing with business expenses, which is an ongoing task. There are always supplies to purchase, vendors to pay, and operational costs to handle. Not to mention you, as a business owner, still have personal responsibilities to take care of. Sometimes in the hustle of trying to take care of things, lines between business life and personal life can get blurred. So what happens if you take care of some personal shopping on your business credit card?

Technically, putting your personal purchases on your business credit card isn’t illegal. That said, making personal purchases on a business credit card likely violates the terms and conditions of your card agreement, which can have some serious consequences. As a general rule, it’s best to keep personal and business expenses separate.

Consequences of using your business card for personal expenses

Applying and getting approval for a business credit card can often be easier than getting a consumer credit card. Even if your business isn’t completely up and running yet, you can still be approved for a business credit card. This may make it tempting to use a business credit card for all of your expenses. However, it’s very important to use a business credit card for business expenses only. Mixing business expenses with personal expenses complicates your expenditures on a few different levels. Aside from creating accounting headaches, you’re also taking away funds meant to help your business thrive. Not to mention, there are consequences for your account and possibly for your ability to get credit in the future.

Your account may be closed

When you’re approved for a business credit card, you agree to the terms and conditions that come along with using your account. According to Mike Pearson, founder of Credit Takeoff, “Most business credit card issuers will make you sign an agreement where you agree not to use your business card for personal expenses. And, if you violate the terms of your agreement, then they have the leverage to cancel your card.”

If your card issuer notices patterns in your expenses that are outside of your normal business expenses, that may send up a red flag. When you use your business credit card for personal spending, you are going against the contract terms for the card, which is grounds to close your account.

You may become personally liable

Mixing your personal and business finances could end up making you personally liable for any business debt if your business has legal trouble. Credit industry analyst Greg Mahnken says, “Co-mingling your personal and business funds presents a risk because it can allow courts to pierce the corporate veil and hold you personally liable for your business’ liabilities.”

Most credit card issuers will require you to sign a personal guarantee before approving a business credit card. Mahnken says that because of this guarantee, “You’re almost certainly legally liable for your business credit card’s balance, so charging large personal purchases to a business credit card poses the same threat as charging large business expenses.” It’s simply not worth it to put yourself at risk for that liability.

Purchases will have limited consumer protections

When you use a business credit card, you may lose protections on certain purchases that you would have had if you’d used a personal credit card. That’s because business credit cards are not regulated by the same protections as consumer credit cards. Many of the CARD act protections don’t apply to business credit cards. These protections include:

  • Prevention against raising interest rates without notice
  • Prohibition of interest rate increases on existing balances
  • Prohibition of interest charges on debt paid on time
  • Application of payment to highest interest rate charges first

Congress has introduced a bill to include these protections for business credit cards, but nothing has gone through yet.

Other concerns when making purchases with a business credit card are that you have less time and more difficulty disputing charges. You also have fewer protections against how debt collectors choose to handle collection.

Both your personal and business credit scores will be affected

You may be tempted to use your business credit card for personal purchases to help build up your personal credit score. While this seems like a good idea on the surface, it probably won’t yield the result you’re looking for. This is because most business credit cards only report to business credit bureaus. The gains you make on your business credit card score likely won’t transfer to your personal credit score. However, if you are putting personal expenses on your business credit card and can’t pay them off, you may see your personal credit score take a hit. This is because of the personal guarantee you sign before receiving your business credit card. Mahnken says, “If you can’t pay off your balance, your personal credit will likely suffer.”

You’ll pay more in the long term

Business credit cards usually have higher fees and higher interest rates. The trade off for these higher rates is that most of your business expenses and interest are tax deductible. Personal purchases, however, are not tax deductible, so you will have no return on those purchases. If you are making personal purchases using your business credit card, those purchases will cost you more in the long term. Not to mention, you will be taking valuable funds away from your business when you use business credit for personal needs.

It’ll be harder to track business expenses

Tracking your business expenses will help you understand what areas your business is growing in and where your business is losing money. It also gives you an idea of your main expenditures and places where you can cut costs.

When you muddy the water with personal expenses, it becomes more difficult to understand the needs of your business and its overall financial health. And according to tax advisor Michael Eckstein, “Even if you try filtering them out, your personal expenses can skew your business reports and make it very difficult to see how well (or poorly) your business is doing.”

Reliable recordkeeping is also really important when you’re applying for business funds, whether it’s a loan, a grant or a line of business credit. If your personal finances are mixed in with your business finances, you will probably have a difficult time getting funding and may not be able to do so at all until you’ve cleaned up your accounts.

Your taxes will be more complicated

Most business expenses are tax deductible; personal expenses are not. Mixing the two makes it complicated to file your taxes and can cause even deeper problems if the IRS ever chooses to audit you.

For example, let’s say you take a business trip that also includes a family vacation. During that time you have several dinners that you charge on your business credit card. Some of those dinners are with clients and some are with family. When it comes time to document your expenses, it may be difficult to tell the dinners apart. Your credit card company may not be able to catch these mistakes, but the IRS is a bit more meticulous. In the event that your expenses are audited after filing, you may end paying fines or even back taxes.

What if you accidentally use a business credit card for a personal expense?

Accidents happen. It’s not an unlikely scenario for you to accidentally use your business credit card to pay for a personal expense. If this happens, you can repair the damage. For starters, make sure you flag the personal purchase so that it is not included in any of the bookkeeping for your business. Next, make sure you pay off the personal expense as soon as possible so that it doesn’t take away from your available credit balance for your business. If you are not the sole proprietor of the business, you will also need to think about how you will report the mistake to the necessary parties in the business.