Can I Use a Business Credit Card for Personal Expenses?

Many small business owners wonder if they can use a business credit card for personal expenses. While convenient, this practice introduces important complexities.

Permissibility and Common Practice

Generally, business credit card issuers process transactions without monitoring the purchase nature. However, financial professionals strongly advise against using them for personal expenses.

This practice, known as “commingling of funds,” mixes personal and business finances. This makes it difficult to distinguish between the two, complicating financial record-keeping and making it challenging to accurately track profitability and manage budgets.

Financial Record Keeping and Tax Effects

Commingling funds significantly complicates accurate financial record-keeping for a business. When personal expenses are paid with a business credit card, it becomes difficult to distinguish legitimate business expenses from personal ones, making it harder to assess the business’s performance and manage cash flow effectively.

Personal expenses paid with a business card must be categorized as a “distribution” or “owner’s draw” for sole proprietorships, partnerships, or Limited Liability Companies (LLCs). For corporations, such transactions might be considered a loan to the shareholder. These personal expenses are not business expenses and cannot be deducted for tax purposes.

Personal expenses are never tax-deductible. Incorrectly deducting them can lead to scrutiny from the Internal Revenue Service (IRS). Inconsistent financial records, particularly those showing commingling, can raise red flags during an audit. Misclassifying expenses can result in disallowed deductions, leading to penalties and interest charges. While business credit card rewards are generally not taxable, using points or miles for business expenses means those expenses cannot be deducted.

Impact on Business Legal Standing

Maintaining a clear distinction between a business and its owners is fundamental, especially for entities like LLCs, S-Corps, and C-Corps, which offer “limited liability protection” or a “corporate veil.” This protection shields the owner’s personal assets from business debts and lawsuits.

Consistent commingling of funds, including using business credit for personal expenses, can be viewed by courts as a failure to maintain this separation. This practice can lead to “piercing the corporate veil,” where a court disregards the legal distinction between the business and its owners. If the corporate veil is pierced, a court could hold the owner personally liable for business debts or legal judgments, negating the limited liability protection. This risk is particularly pronounced for closely-held corporations and small LLCs.

Beyond legal risks, commingling can undermine the perception of professionalism with lenders, investors, and vendors. A lack of clear financial separation can make a business appear less credible, potentially impacting its ability to secure future financing or establish partnerships. Lenders often require clear financial statements to assess a business’s health, and commingled funds make this assessment difficult.

Personal and Business Credit Implications

Using a business credit card for personal expenses can impact both the business’s and the individual’s credit profiles. Business credit scores are built on factors such as payment history and credit utilization. High utilization or missed payments on a business card, even if due to personal expenses, can negatively affect the business’s creditworthiness. A strong business credit score is essential for securing favorable loan terms and establishing a solid financial reputation for the company.

Many business credit cards require a personal guarantee, meaning the individual applicant is personally responsible for the debt if the business cannot pay. If the business card activity is reported to consumer credit bureaus, the individual’s personal credit score can be affected by high balances or late payments, even if the expenses were personal. This is particularly true if the card issuer reports monthly utilization or late payments to personal credit bureaus.

Mixing personal and business expenses on one card can significantly increase the difficulty of managing debt and cash flow. This lack of clarity can lead to higher interest charges or missed payments, further damaging both credit scores. While some business cards do not report to personal credit bureaus unless there are severe delinquencies, many still require a personal guarantee that can link business debt to personal liability.