How to Handle Charges on Personal Credit Cards

[Llewelyn A.]

I would like some opinions on something that probably happens every day in the life of a business person.

Let's say hypothetically, you own 100 Main Street, LLC.

You were denied a Credit Card so all you have is a Debit Card, but you don't yet have enough money to pay for some of your capital expenditures.

You do have $10k Credit on a Personal Credit Card that you have yet to use.

If you go ahead and pay for some of those Capital Expenditures, for instance, a new boiler for $1k, a replacement fridge, $1k, etc. is this something that would pass an Audit of 100 Main Street, LLC if you claimed the Capital Expenditures on it's books?

What about smaller items, such as printer paper, etc.

Each one of these items would come with it's receipt and saved for an Audit.

Will the fact that you made the claims for these expenses AND have the receipt have enough evidence that these were NOT personal expenses but rather business expenses on the LLC?

To expand this hypothetical scenario further, let's say you have a Personal Credit Card that gives you a LOT of perks, for instance, airline miles, hotel credits, cash back, etc.

You want to use this card for ALL your business purchases and get the benefits.

Will this fail an IRS Audit even though you have all the receipts and the Credit Card Statements?

Will the fact that you may be making personal purchases, such as buying a movie ticket, etc. matter as long as you only claim the business expenses?

What happens if you put 10 of your Investment Properties into separate LLCs. Are you expected to have 10 separate Credit Cards, one for each property? Or can you use just one Credit Card but allocate the Purchase Transactions appropriately?

What is the right way to do it so that:

1) The IRS would be fine with it

2) Not open the door to piercing the Corporate Veil

How have you done it in the past?

Thanks!

[Michael Plaks]

Originally posted by @Llewelyn A.:

Q: If you go ahead and pay for some of those Capital Expenditures, for instance, a new boiler for $1k, a replacement fridge, $1k, etc. is this something that would pass an Audit of 100 Main Street, LLC if you claimed the Capital Expenditures on it's books?

A: Yes. It's not how you paid for your expenses, it's the fact that you did pay (which includes on credit) and that those expenses qualified as business expenses ("ordinary and necessary" in the IRS lingo)

Q: What about smaller items, such as printer paper, etc.

A: Same answer as above for capital expenditures.

Q: Will this fail an IRS Audit even though you have all the receipts and the Credit Card Statements?

A: It won't. The distinction between business v personal credit card is in how they are used, not how they are set up.

Q: Will the fact that you may be making personal purchases, such as buying a movie ticket, etc. matter as long as you only claim the business expenses?

A: Yes, it will. It will turn a simple audit into a nightmare. You will have an uphill battle against the IRS presumption that everything on this card was personal and that you're cheating.

Q: What happens if you put 10 of your Investment Properties into separate LLCs. Are you expected to have 10 separate Credit Cards, one for each property? Or can you use just one Credit Card but allocate the Purchase Transactions appropriately?

A: The latter is usually the answer, but it depends on your setup. This is a long discussion, best left for your accountant.

Read my detailed, line-by-line answers above.

General follow-up: the cleaner your separation of money between business and personal, the easier your IRS audit will be. And your business life in general.

Also, I'm not an attorney, but I'm sure that they will tell you that commingling would weaken if not destroy your asset protection.

There're clean ways to charge things on personal cards and then have your business pay the credit card bill, as long as the card is used 100% for business. Anything less than 100% is trouble.