Every year, as we prepare small business tax returns, we see some of the same mistakes with credit cards. At the same time, for most small businesses, a credit card is an indispensable resource for managing procurement – after all, who can deny that a credit card, managed properly, allows many small companies the chance to:
- Pay vendors quickly and easily
- An easy way to purchase for the business on the spot
- Easily manage your expenses against your cash flow
- Most business credit cards offer perks and rewards that can add value to your business
- Properly used, they can also improve your company’s business credit rating
While often seen as a necessity, business credit cards are not without risks. If you mishandle your company credit card, you could run into some real trouble.
- It’s tempting to buy everything up front rather than waiting until you can afford it, which could leave you in deep debt
- Credit card interest should be money in your pocket, not the bank’s
- Bad credit card habits can have tax implications (failing to keep receipts, commingling funds, etc.)
- Business credit cards aren’t covered by the same consumer protections as personal credit cards, which could increase your risk
- Properly handled credit cards can help your credit rating, mishandled credit cards can damage it
In order to reap the benefits and reduce the risks of small business credit cards, follow these best practices:
Pay your full balance
Most business credit cards allow you zero interest as long as you maintain a zero balance each month. The day you allow your business to carry a balance, is the day you start paying interest. It can also make it harder to pay down the balance next month, which could lead to a slippery slope of growing credit card debt.
Pay on time
Miss the payment due date, and you’ll trigger a late fee in addition to the interest. On top of that, you’ll risk your interest rate going up and a ding on your credit. The remedy is to be organized. Don’t let your bills build up. Instead, establish a rhythm for paying bills. For example, designate every even-numbered Friday as a payday for any outstanding bills.
Do not commingle funds
As a business owner—especially if you’re a sole proprietorship—it can be tempting to use your business credit card for personal purchases. Commingling business and personal funds has the potential to negatively impact contracts and grants, cross ethical boundaries, make tax reporting difficult, or in some cases, may even be against the law. It’s sound business practice to avoid commingling funds altogether.
Keep it secure
With all the other things on your plate, do you really want to deal with credit card fraud, too? When not in use, be sure to keep your business credit card in a secure location. While it seems obvious, many small business owners forget that physical security of your office is important.
From an accounting perspective, I’ll have to admit, well-documented credit card usage is often easier to handle in tax preparation than bank statements. Using your credit wisely and paying off each month’s debt on time can allow you to easily handle payments and procurement. Even better? Properly managed, you are effectively able to operate your business outside of regular cashflows, so you have, at least in theory, extra financial resources at your disposal each month to grow your business. You always have an emergency fund…………just in case.
Don’t get caught by surprise by the IRS. Be Informed and prepared. If you receive a letter or notice from the IRS call New Life Tax Resolutions. We specialize in tax controvery. Our team is dedicated to resoving tax issues that arise in your business or individual life. Don’t run scared, run to the phone and call me Patrick LeClaire @407-287-6638.