Is it a Legal Offense to Use a Business Credit Card for Personal Expenses?

Business credit cards are essential tools for managing the ongoing expenses that come with running a business. From purchasing supplies to paying vendors and handling operational costs, these cards offer convenience and flexibility. However, in the midst of the hustle, the line between personal and business expenses can sometimes become blurred. So, what happens if you accidentally use your business credit card for personal shopping?

Using your business credit card for personal expenses is not technically illegal. However, it likely violates the terms and conditions of your card agreement, which can have serious consequences. While it’s always best to keep personal and business expenses separate, let’s take a closer look at what you need to know if you find yourself in a situation where you mistakenly charge a personal purchase to your business card.

Consequences of Mixing Personal and Business Expenses

Obtaining a business credit card is often easier than getting a consumer credit card. Even if your business is not fully established or registered, you may still qualify for a business card. While it may be tempting to use your business credit card for all expenses, it’s crucial to remember that you should only charge business-related expenses on your business card.

Mixing personal and business expenses complicates your financial matters on several levels. Apart from creating accounting headaches, it depletes funds that are meant to help your business grow. It also muddies the waters when it comes to building business credit. Furthermore, using a business credit card for personal expenses can lead to problems with your account and potentially harm your ability to obtain credit in the future.

Your Account May Be Closed

When you are approved for a business credit card, you agree to the terms and conditions that accompany the card. Most business credit card issuers require you to sign an agreement stating that you will use the card only for business purposes. Violating this agreement gives them the leverage to cancel your card.

If your card issuer notices patterns in your expenses that deviate from normal business spending, it can raise a red flag. Using your business credit card for personal expenses goes against the terms of the card agreement, which can result in the closure of your account.

You May Become Personally Liable

Mixing personal and business finances can make you personally liable for any business debt if your business encounters legal issues. Commingling personal and business funds risks allowing courts to hold you personally responsible for your business’s liabilities.

Most credit card issuers require you to sign a personal guarantee before approving a business credit card. This guarantee means that you are legally responsible for your business credit card’s balance. Charging large personal expenses to a business credit card poses the same threat as charging large business expenses.

Purchases Will Have Limited Consumer Protections

Using a business credit card for personal purchases may result in the loss of certain consumer protections that you would have had with a personal credit card. Business credit cards are not regulated by the same laws as consumer credit cards.

Many of the protections provided by the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) do not apply to business credit cards. This includes protections against sudden interest rate increases, interest charges on timely debt payments, and specific rules regarding payment allocation. Additionally, you may have less time and more difficulty disputing charges and fewer protections against debt collectors’ actions.

Both Your Personal and Business Credit Scores Will Be Affected

Using your business credit card for personal expenses might seem like a way to build up your consumer credit score. However, most business credit cards only report to business credit bureaus, meaning any positive impact on your business credit score won’t transfer to your consumer credit score.

If you use your business credit card for personal expenses and can’t pay them off, your personal credit score may suffer. This is because of the personal guarantee you sign when obtaining a business credit card. Failure to pay off your balance on time can negatively impact your personal credit.

You’ll Pay More in the Long Term

Business credit cards generally come with higher fees and interest rates. The trade-off is that most of the interest and fees on business purchases are tax-deductible, along with the business expenses themselves. On the other hand, personal purchases are not tax-deductible, meaning you will receive no financial return on them. Therefore, if you make personal purchases with your business credit card and carry a balance, you will end up paying more in the long run.

It’s Harder to Track Business Expenses

Accurate tracking of business expenses is vital for understanding your business’s financial health and identifying areas for growth or cost-cutting. When personal and business expenses are mixed on the same card, it becomes challenging to assess your business’s needs and overall financial status.

Even if you try to filter out personal expenses, they can distort your business reports and make it difficult to evaluate your business’s performance. Reliable recordkeeping is crucial when seeking business funding, such as a loan, grant, or line of credit. Mixing personal and business finances makes it challenging to obtain funding or clean up your accounts.

Your Taxes Will Be More Complicated

Business expenses are generally tax-deductible, while personal expenses are not. Mixing the two makes tax filing complicated and can create problems if you are audited by the IRS.

Suppose, for example, you go on a business trip that includes a family vacation. During this trip, you charge several dinners to your business credit card, some with clients and some with family. When it’s time to document your expenses, distinguishing between business and personal dinners can be challenging. Your credit card company may not detect any discrepancies, but the IRS is meticulous. If your expenses are audited, you may face fines or have to pay back taxes.

What to Do If You Accidentally Use a Business Credit Card for Personal Expenses

Accidents happen, and it’s not uncommon to accidentally use your business credit card to pay for a personal expense. If this occurs, there are steps you can take to rectify the situation. First, ensure that you identify and flag the personal purchase so that it’s not included in your business’s bookkeeping.

Next, make it a priority to pay off the personal expense as soon as possible to avoid reducing your available credit balance for business purposes. If you are not the sole proprietor of the business, you need to report the mistake to the relevant individuals or teams within the organization.

Wrapping Up

Using your business credit card for personal expenses is not considered a legal offense. However, it is likely a violation of your credit card agreement’s terms and conditions. The consequences can be severe and include account closure, personal liability, tax implications, complex bookkeeping, and negative impacts on your personal and business credit. Additionally, you may face higher interest charges.

In the event that you accidentally charge personal expenses to your business credit card, take immediate action to inform the necessary parties and ensure the expense is flagged and excluded from your business accounting.