Personal Expenses Through Business Accounts: What Business Owners Need to Know

One of the most common bookkeeping issues we see, especially with small business owners—is the use of business bank accounts or business credit cards for personal purchases. While it may seem harmless (especially if the expense is later coded correctly), the IRS views this practice very differently than many owners expect.

This blog breaks down what happens when personal expenses run through business accounts, how the IRS looks at it, and why it can create bigger problems during an audit.

What Are Personal Expenses in a Business?

Personal expenses are costs that do not have a clear and ordinary business purpose. Examples include:

• Personal groceries or household items

• Family vacations or airfare not related to business

• Personal medical expenses

• Clothing is not required for work

• Personal subscriptions or memberships

• Amazon, Walmart, Target, Etc.

If these purchases are made using business-owned bank accounts or credit cards, they are considered personal expenses paid by the business—even if they are later coded to an owner distribution or owner draw.

“But I Coded It to Owner Distribution — Isn’t That Okay?”

From an accounting standpoint, coding personal expenses to:

• Owner Draw / Owner Distribution (sole proprietors & partnerships)

• Shareholder Distribution (S-corps)

• Shareholder Loan or Due from Owner

is the correct way to record them after the fact.

However, correct coding does not mean the practice itself is acceptable or risk-free in the eyes of the IRS.

The IRS cares not only about how the transaction is categorized, but why business funds were used for personal purposes in the first place.

The IRS Term for This: Commingling of Funds

The IRS refers to this behavior as commingling of funds.

Commingling occurs when business and personal finances are mixed instead of being kept separate.

Why this matters:

• It weakens the separation between you and your business

• It undermines the legitimacy of the business entity

• It creates audit red flags

• It can threaten liability protection (especially for LLCs and corporations)

Even when personal expenses are coded properly, frequent commingling signals poor financial control.

Does This Increase Audit Risk?

Yes—especially when it happens often.

During an audit, repeated personal transactions in business accounts can:

• Raise questions about whether other expenses are truly business-related

• Trigger a deeper review of expense categories

• Lead the IRS to examine personal bank and credit card statements

• Increase scrutiny of distributions, shareholder loans, and retained earnings

In severe cases, the IRS may question whether the business is operating as a legitimate entity or simply acting as a personal spending account.

Potential Tax Consequences

Depending on the business structure, misuse of business funds can lead to:

Sole Proprietors & Partnerships

• Disallowed deductions

• Reclassification of expenses

• Additional taxes, penalties, and interest

S-Corporations

• Personal expenses reclassified as wages, triggering:

• Payroll taxes

• Penalties for unfiled or incorrect payroll reports

• Issues with reasonable compensation

LLCs & Corporations

• Loss of liability protection in extreme cases

• Increased audit exposure

• Shareholder loan complications

Why Bookkeepers and CPAs Strongly Discourage This Practice

Even when we “fix” the books by coding expenses to distributions, the underlying issue remains:

The business account was still used for personal spending.

From a compliance and risk standpoint, the cleanest books—and the lowest audit risk—come from:

• Strict separation of personal and business finances

• Using personal accounts for personal expenses

• Using business accounts only for legitimate business costs

Best Practices to Avoid Problems

To protect yourself and your business:

• Maintain separate personal and business bank accounts

• Having a dedicated business credit card

• Transfer money to yourself via owner draws or payroll before spending

• Avoid “temporary” personal charges on business cards

• Report any personal transactions to your bookkeeper as soon as they occur, so they can be properly documented and corrected

If a personal expense does slip through occasionally, document it clearly and correct it promptly—but do not make it a habit.

Final Thoughts

While coding personal expenses to owner distributions may keep your books mathematically accurate, it does not eliminate IRS concerns. Frequent use of business accounts for personal purchases—no matter how well documented—can increase audit risk, invite deeper scrutiny, and create unnecessary tax exposure.

Clean separation between business and personal finances is one of the simplest and most effective ways to protect your business, your tax position, and your peace of mind.

If you’re unsure whether certain transactions are problematic or want help tightening up your processes, working with a qualified bookkeeper or CPA can make all the difference.

Written by Melissa Crowe, Senior Bookkeeper, Hamm Accounting Firm LLLP