Is it okay to spend money on personal expenses with your business account or business credit card?

The quick answer is no. It’s illegal. You shouldn’t do it. If the IRS audits you and finds out that you are doing that, you’re going to get into a lot of trouble. You’ll get fined and you’ll have to pay extra money in penalties and taxes.

But this doesn’t seem to deter people from wanting to do it. In a given year, the IRS audits approximately less than 1% of returns, and they only audit three years back. The chances of getting audited are slim, but the rewards for claiming personal expenses as business expenses are high. Writing off several thousand dollars worth of personal expenses as business expenses saves you several thousand dollars in income tax.

I’m not a tax professional, so I can’t go into detail about what the tax consequences will be if you do this anyway. But I do bookkeeping for quite a few businesses… and some of them are writing off food and travel expenses that are personal expenses as business expenses.

It’s not my place to tell them not to do it. I can only advise, not force. And because they’re paying me! I don’t want to lose a client.

However, I want to express my personal view on this. I find that business owners fall into two camps.

In one camp, they treat their business like it’s some sort of personal piggy bank where they spend money on personal expenses. It’s all good! Save money on taxes! Stick it to the IRS!

The other camp takes its finances seriously. They do everything right.

I want to describe both camps. The first camp would go to Dunkin’ Donuts every morning and buy a cup of coffee for themselves. Then they’ll justify to themselves, “That’s a business expense. I’m not with a client but I can say that I was. Because treating my client to coffee makes me a nice person. And that will help me in the long run when they give me more business.”

Everyone needs to eat, whether they own a business or not. People in the first camp will order lunch at Panera Bread. And then say to themselves, “Since I own a business (and I’m always doing business) and I need to eat, this is a business expense.

Some of the things I see that they try to pass off as business expenses are a little outrageous. I got a receipt for a $500 tattoo. I cannot see in my mind how you can claim a $500 tattoo is a business expense. Now, the IRS is not going to go line-by-line checking. They don’t see that on your return. They’ll see that when they audit you, but on a return, you could lie and categorize the tattoo as an office expense.

The only industry I believe a $500 tattoo can legitimately be claimed as a business expense would be the porn industry. I can’t imagine anything else. If you guys can think of a different industry, let me know in the comments below.

People do think like this. The reward and the incentive are quite great because you could save several thousand dollars in taxes. Spend $500 on a tattoo, reduce your business income by $500, then pay approximately $100 to $150 less in income taxes. Every time you spend $3 on coffee, you save about a dollar in income taxes. I don’t think this mindset is productive. It’s short-term! For people who spend money like this, their businesses tend to not grow.

In the second camp, business owners take their business finances extremely seriously. They separate their business life from their personal life. The business checking accounts and credit cards are for ordinary and necessary business expenses.

In my experience, their businesses tend to grow year after year. That’s because they make decisions for their business based on accurate financial reports. If your personal expenses are recorded in your financial reports, there’s no way for you to gauge how profitable your business is. You cannot analyze your reports and pinpoint positive or negative financial trends back to a past business decision. Then it’s impossible to learn from those past mistakes.

Another reason why I don’t recommend it is no one will want to invest in or buy your business.

I know a business owner who wanted to buy a cafe. He searched and found a potential cafe for sale. He wanted to finance his acquisition with a small business loan. Problems began when he asked for their business tax returns from the last three years. According to their tax return, it was not a very profitable business.

This was a small mom-and-pop operation. The husband and wife said, “Actually, the cafe is more profitable than it looks like on these reports. Our cost of goods sold is higher than it should be because we bought household groceries with our business accounts. We did this to pay less money in taxes.”

The buyer couldn’t accurately judge whether the cafe would be a good investment. He decided not to buy the business. I would say that couple’s loss was their own doing.

Can you imagine one day you want to scale your business and need to take on investors? These investors ask, “Before I invest, show me the financials going back to the year you started this company.” And since you spent money on personal expenses claiming they’re business expenses, the company doesn’t look as profitable. These investors are not going to want to invest with you.

That is why beyond that slim chance of getting audited and caught by the IRS, I don’t recommend you do it. Find ways to legitimately lower your taxable income. Don’t engage in short-term thinking. The people who succeed financially in personal and business have a long-term view that guides their decision-making.