If you have a business or are starting a business, you may have got approval for a business credit card.
You may be wondering if you’re allowed to use the card for the occasional personal purchase. The answer is no.
It’s important that you keep business and personal expenses separate. At best you could be depriving your business of important funds and at worst you could face some serious legal problems.
If you go down the path of using a credit card for personal expenses, there could be consequences, such as the business credit card issuer cancelling your card for violating agreed terms of usage. Also, if you require business finance at some point in the future, a lender could ask for your card statements, and personal expenses on your business card could affect the chances of approval.
To ensure you don’t use your business credit card for personal expenses, it is important to have a clear distinction between personal and business expenses. If you’re wondering what qualifies as a business expense, check if it is all of these:
…for running your business.
What qualifies as a reasonable expense?
While it isn’t always easy to put a finger on what is a reasonable expense, it may be easier to look at some examples of unreasonable expenses:
- You hire a famous (and pricey) designer to design your company bathroom
- You pick up a steak and a bottle of wine for yourself and charge it to the company card
- You book a private yacht for yourself and your family on the company credit card
Note if you were to buy the wine to celebrate a good business year and share with your employees at the company annual dinner, it might qualify as a reasonable business expense. The general rule is ‘if in doubt, err on the side of caution’ or seek advice.
What counts as an ordinary expense?
To understand whether an expense is ordinary or not depends on the nature of your business. You might be spending $1,000 on food every month for exotic tropical birds. If you run a pet store, then it’s fine; however, if you’re in the business of manufacturing copier cartridges then perhaps it’s not an ordinary expense.
Note, ordinary doesn’t mean usual. An expense that you might only pay once during the entire run of your business, such as getting rid of bats in the attic might still qualify as a business expense and chargeable to your business credit card.
Is the expense really a necessary expense?
How do you decide if an expense is necessary or not? Much like a reasonable expense, there is no easy way to determine if an expense is necessary. But there are numerous examples of unnecessary expenses:
- Renting a shoe shiner for your employees, at a telemarketing firm
- Purchasing state-of-the-art gaming PCs at your car dealership
The litmus test is to know if an expense is ‘appropriate and helpful’ for your business.
Here’s a quick look at what qualifies as business and personal expense
While it’s not always hard to make the mistake of mixing business and personal expenses, it can get you into strife. Here’s a quick look at what is acceptable as a business expense and what isn’t.
Acceptable business expenses:
- Food and accomodation if you or your employees are traveling for work for more than a day
- Uniforms or work clothes that are needed for work and are not suitable other times
- Local transport when traveling between workplaces for work
- Subscriptions to professional or business organisations
- Work-related educational and training expenses
- Tools and other supplies necessary for work
- Union fees
- Home office expenses, but only if the office is used exclusively for work
- Business use of your car (excluding mileage for personal trips)
Unacceptable business expenses:
- Transport from home to work
- Fines or penalties, such as parking tickets
- Business clothes (sometimes getting a work uniform dry cleaned is acceptable)
- Travel expenses for family members if they are joining you on a business trip
The best way to determine whether an expense is business or personal is by asking yourself whether the expense helps you earn income for your business, directly or indirectly.