Credit cards can be a convenient source of cash flow for entrepreneurs, especially in the start-up stage. “We have a local client that now has over $5 million in revenues, but they started with three very low-limit credit cards,” says Robyn Pangman, a Chartered Professional Accountant (CPA) based in Oakville, Ont.
But as with all aspects of your business, credit card spending requires a thought-out strategy. Here Pangman walks us through what expenses are best charged to the company card – and what to pay for in other ways.
Capital expenses. Using a credit card to make capital investments such as equipment or office furniture may be the only option for a new business. But even if you have the cash on hand to pay for a large item, charging it to the company card may be a smarter move. “Purchasing bigger items with a credit card can help improve your credit rating, as long as you can pay them off right away or make regular payments towards them,” Pangman says. Frequently using cards and promptly paying them down may be the only way for a start-up to establish a strong credit score, which can help secure other forms of funding in the future.
Travel expenses. Many credit cards include travel insurance coverage when you use them to book expenses such as flights, hotels and car rentals. If you frequently travel for business, look into the insurance offered by your card before purchasing a separate plan. Plus, if you’ve got a rewards card, the added bonus of building points towards future corporate travel can help mitigate future costs.
Meals and entertainment. Credit card statements can help you keep track of smaller purchases such as client meals and entertainment, and will give you supporting documentation come tax time. “If you use your debit card to pay for expenses, there are going to be different transactions going through, including deposits, withdrawals and transfers, but with a credit card, it’s all expenses,” Pangman says. Yet she cautions it’s still important to keep all receipts with detailed notes on the purpose of each expense, regardless of your method of payment. While a credit card statement may be sufficient to back up your purchases for income taxes, they’re not enough proof for an HST audit.
Keep off the company card:
Car maintenance. “Many business owners make the mistake of paying for vehicle expenses on the company card,” says Pangman, “but this can complicate your bookkeeping.” While you can write off a portion of your car if you use it for business, there is always going to be a personal element to your vehicle use (unless you’re driving a business-only corporate vehicle). Pay for gas, parking and any vehicle repairs on a separate card or with cash to keep things simple for tax filing, and talk to your accountant to determine what percentage of your vehicle you can claim as a business expense.
Medical expenses. Prescription medications, eyeglasses, massage therapy and other healthcare related expenses can be claimed as deductions on your personal tax return, but they are not considered business expenses. Here again, it’s best to pay for these services on a separate personal card.
When considering what to put on the company card, always think about keeping your business and personal spending separate, Pangman advises. “If you can stick to purely business expenses on your business credit card, then it makes things a lot easier for tax filing.”