• Using business credit cards can be one of many good financial decisions that small business owners make to pay for everyday purchases while opening up cash flow and earning rewards.
• It’s important to keep personal expenses separate from business expenses for legal and tax reasons.
• Find out seven credit card expenses you should never put on a business credit card and four you should in this article from Nav’s experts.

What Are Business Expenses vs. Personal Expenses?

For any business entity like a limited liability company (LLC) or corporation, it’s important to keep the company legally separate from its owners or shareholders. This is a concept known as maintaining the corporate veil, and it protects individuals from personal liability if something goes wrong with their business. The number one way to keep the corporate veil intact — or maintain separation — is by separating the business’s expenses from the personal expenses of the owners or shareholders.

A business’s expenses are any purchases that pertain to the business’s operations and are “necessary and ordinary,” according to the IRS. This can include:

• Equipment
• Computers
• Inventory
• Business travel
• Mileage if you or your employees have to drive
• Cell phone services 
• Wifi
• Software subscriptions
• Entertaining clients

You can generally get tax deductions for these expenses, and if you use personal cards or money to pay for them, your company should issue you a reimbursement. Many companies issue business credit cards to their employees so that they can use the cards to pay for business expenses directly. 

Personal expenses are any purchases that an individual makes that aren’t necessary to the company’s operations. It’s important to keep business credit card expenses strictly to business uses for a number of reasons that we explain below.

How Misallocation of Expenses Harm a Small Business

Misallocation of expenses — or when an employee uses business credit cards or money to pay for personal expenses — can harm a small business in a number of ways.

First of all, it’s basically the same as taking money from the business. Employees should be paid with a paycheck for their time, and use that money for their personal needs. If they’re using a company credit card to pay for personal expenses, they’re taking money away from the business. This can put the small business in a bad position, as it loses money meant to help it operate. 

But misusing company money can also get the business in legal trouble. If a company tries to get a tax deduction for personal expenses, they can face an audit, fines, and even legal action. If an owner or shareholder misuses the business expenses credit card to make personal purchases, it also makes it difficult for the business to separate personal finances from business finances, which could put the individual at risk for liability. 

Also, because credit limits for business credit cards can be much higher than personal credit cards, cardholders may be tempted to overspend for personal use. If the company refuses to pay for the expense or if there’s confusion about it, the cardholder’s personal credit score could be impacted by late payments or negative payment history. Many business credit cards report to the major credit bureaus, which means that overspending can impact the business’s credit history as well as the individual’s. In order to keep your business credit report intact, it’s better to keep personal expenses off the business credit account. If you’re not already building your business credit, learn how to establish business credit from Nav’s experts, too. 

Expenses That Should Almost Never Be Charged on a Business Credit Card

There are several personal expenses that you, your employees, or your shareholders should almost never charge to your business credit card. While it may seem like making these big purchases to earn rewards points on your business credit card is a good idea, the interest rates for credit cards are generally much higher than other forms of business financing. In many cases, the major credit card issuers — like Visa, Mastercard, or American Express — won’t let you pay for these expenses with a corporate credit card or consumer credit cards, anyway. 

You should avoid using your business expenses credit card for these transactions:

1. Mortgage or rent

In almost every case, you shouldn’t charge your personal mortgage or rent to a business credit card. In most cases, a mortgage company won’t let you pay with a credit card anyway, and rental properties will probably charge very high fees if you use a credit card. Some exceptions may include if your business is run completely out of your house, but you may run into issues with zoning laws or rental agreements. But you probably shouldn’t charge your business’s rent or mortgage to a business credit card, either. Again, most mortgage companies won’t accept debt-for-debt payments through a credit card anyway. 

2. Payroll

You may be tempted to use your business credit card to run payroll so that you can earn cash back or other rewards. Payroll makes up a big chunk of most companies’ cash expenses every month, and it can be hard to get other types of financing, like small business loans, to cover the cost. However, most credit card companies will have terms and conditions that prohibit you from using your business credit card to pay for payroll. It’s best to pay employees using liquid cash from your business accounts rather than to try to use a business credit card. 

3. Personal travel

If you travel often for business, you may piggyback your personal vacation time onto your business trips. But it’s important to keep your personal travel expenses separate from your business travel. Many employees choose to pay for business travel using their own personal rewards credit card and get reimbursed by the company so that they can earn travel rewards points for their personal use. This is a perfectly acceptable way to pay for business travel, as long as your expense reporting and expense management systems are set up for it. It’s better to keep the company credit card out of the equation if there could be any chance for misuse or confusion. 

4. High-risk investments

It’s never a good idea to use business funds to pay for high risk investments, but using a business credit card to buy stocks is generally out of the question. For the most part, brokerage firms won’t let you use a credit card — personal or business — to fund brokerage accounts. They generally only accept ACH or bank transfers, wires, or checks. 

5. Personal medical

Healthcare is a big expense for most individuals in the U.S., and even with a company covering the cost of insurance, those bills add up. But it’s not a good idea to use your business credit card to pay for personal medical expenses. Personal credit cards or health savings account (HSA) cards are a much better way to pay for personal medical problems. 

6. Legal issues

Whether it’s a divorce, personal injury, or estate planning, you should not use your business credit card to pay for personal legal expenses. Again, it’s important to keep personal issues and business issues separate in order to avoid mixing up legal liability. 

7. Cash advances

Cash advances can be tricky on a business credit card. The issue is that you can’t always prove that the cash is for a business expense, and the fee you pay is probably not worth it. Plus, the interest charges can get very high when using a credit card for a cash advance. If your business needs cash for payroll or other expenses, a merchant cash advance (MCA), business line of credit, or other financing may be a better option. 

Expenses That Should Almost Always Be Charged on a Business Credit Card

Using your business credit card for business purposes is an excellent way to help improve your business finances and cash flow and earn rewards. In fact, many business credit cards have rewards programs and perks just for normal business expenditures, like international travel, advertising, and office supplies. Credit cards can also offer consumer protections for business purchases that using cash won’t. 

Here are some things that you should consider charging on your business expenses credit card:

1. Advertising fees

If you advertise your business on social media, search engines, or in traditional media, using your business credit card to pay the invoices can be a great way to earn cash back or other rewards. Many business credit cards offer extra rewards or bonus offers specifically for spending on advertising. Also, it’s easy to set up recurring payments with a business credit card, so if you spend the same amount every month, you can just pay automatically. 

2. Business subscription fees

Whether it’s software, a trade magazine, or local news outlets, you should use your business credit card to pay for business subscription fees. It’s another opportunity to just set it and forget it with an automatic monthly or yearly subscription plan, and still earn cash back and other rewards for expenses you’re already paying for. 

3. Accounting software expenses

If you use Quickbooks, FreshBooks, or other accounting software resources, you can use your business credit card to pay for it. As with other business subscriptions, the credit card can be set to pay off the monthly or annual fee automatically, and you can earn rewards or cash back on your credit card statement easily. 

4. Finance major purchases 

If you’ve got a major business purchase coming up, such as a large amount of inventory for the holiday season or new equipment for expanding your business, you may consider getting a new business credit card to take advantage of any introductory period offers. There are a lot of cards that offer 0% APR for a certain period of time and will give you cash back and other rewards for the big expense. Using a zero-interest welcome offer can be a good way to pay off a big purchase without getting a high interest loan or other financing, as long as you don’t go over your spending limits and make payments on time. 

Nav’s Verdict

The bottom line is this: All businesses should enact policies to keep personal expenses off the business credit card. Make sure you’re maximizing your business credit card usage to keep in line with legal and tax requirements while earning the best rewards for your business. To find the best business credit cards for your business’s needs, sign up for Nav. You’ll get personalized recommendations based on your company’s actual business data with Nav.