This is for a retail shop where I have the option to return at a later time. Usually, I'd hold the purchases until the next time I'm at the mall to return them; however, I actually walked into a nice clearance sale during this shop.

I was paid a flat rate fee of like $8 to do the shop and it required a purchase that would not be reimbursed. To further detail the purchase requirement, there's no minimum $ amount I need to purchase or restrictions on what I can purchase; it just needs to be a purchase to retrieve a Proof of Visit document aka a receipt.

I ended up finding and buying $42 worth of clothes during this shop. Is this considered tax deductible because I bought it during an assignment and it's not reimbursable by the MSC? If the entire $42 isn't tax deductible, but a portion of it can be, how would I determine how much is?



Edited 1 time(s). Last edit at 10/18/2014 06:22PM by Tarantado.

If it's a required non-reimbursed purchase which cannot be returned, I deduct the item with the lowest amount. For example, a clearanced $9 shirt, not a clearanced $20 pair of jeans. I do not deduct the full purchase total.

If it is a required non-reimbursed purchase which can be returned, I do not deduct anything, since I could have returned it, but opted to keep it. I am sure there are others who do it differently, but personally I am not comfortable with it.

For a required purchase that provides reimbursement, I find the lowest-priced thing closest to my reimbursement limit, and purchase that. For example, CATO shops only reimburse $5, and you cannot purchase accessories, so I rarely can find anything in there for under $9 or so, even on clearance. So I deduct the amount over the reimbursement limit. For a $9 shirt purchased with only $5 reimbursement, I deduct $4.

There would be little justification to deduct anything if you could have come right back in and said, "I just realized if I bring this home my husband will kill me because I wouldn't let him by fishing tackle the other day. I better rethink this."

If you had to come back another day, or a couple hours later, or anything other than within the time it would take you to walk to your car and back, then it would be reasonable to deduct one inexpensive item as long as it didn't wipe out the entire fee. The IRS takes a dim view of "businesses" who deliberately lose money.

You appear to need a tax accountant if you are deducting business expenses and do not uinderstad the IRS or State instructions.

isaiah58 Wrote:
-------------------------------------------------------
> You appear to need a tax accountant if you are
> deducting business expenses and do not uinderstad
> the IRS or State instructions.


I will have one..... Thanks for the advice and input? I'd rather be prepared and make sure I'm collecting the right data, as much as possible so I won't be so surprised if I missed a crucial factor in my document tracking come tax time.

I prefer to plan and itemized my fees, reimbursements, non-reimbursed expenses ahead of time as I've performed 100's of assignments this year. If I can learn a thing or two from the experienced shoppers and what they've come across with their taxes, that's what I'll do.

And yes, I have read the thread in the New Shopper's discussion board.

I was a tax accountant some years ago and I would not claim it since it could have been returned. I would however claim the mileage to return it. However, I think it's probably acceptable for you to claim as an expense the cheapest item in the store since you were required to make a purchase. Having said all that though, I probably would claim the least expensive item I purchased and accept that I may lose that claim if I'm audited. It makes the auditor feel good if he/she can disallow something and justify the audit!!

Edited 1 time(s). Last edit at 10/18/2014 10:31PM by jpgilham.

Thanks; that makes sense. I'll be considering the $42 a personal expense and will only account the applicable mileage as the only tax deductible values.

That throws out another question (somewhat off-topic). Let's say my guidelines requires specific purchases at a food shop. If I choose the "bare" minimum hot dog, I'd fall within reimbursement limits. If I choose another acceptable option per guidelines, say a "hamburger," I end up going $2-3 over reimbursement. Will that overage be argued since I "could've" stayed within reimbursement limits if I went with the hot dog instead?

Please hold back any further "go see a tax accountant" comments. I'm asking this question now to make sure I'm not shooting myself in the foot by choosing a menu item I prefer (but of course, still within client guidelines) and thinking that the overage would be considered a tax deductible expense. Same goes like say I ask for an extra side of guacamole that put my total expense beyond my reimbursement limit. If it'll be part of the evaluation, I'd consider it a tax deductible expense for the amount over the reimbursement limit?

I get the idea though that anything "beyond" the guidelines like an extra dessert that's not specifically required by the client should be considered a personal expense. It's just the ticky tacky details I want to make sure I'm clear on.



Edited 1 time(s). Last edit at 10/19/2014 12:38AM by Tarantado.

When you deduct a meal item you were not reimbursed for (or buy a more expensive item when you had a cheaper choice), it falls in a different category on the tax return. Now you are talking about the "meals and entertainment" deduction, which is limited to 50%. It also requires you to be entertaining a business associate and that you record the business purpose of the meal.

Well, that can work with mystery shopping for fine dining where you have to have a companion. (won't work for fast food, where you eat alone)

Business purpose: to do the mystery shop and make $$. Which does not work if the shop is reimbursement-only and there is no fee offered.

If there is a fee, you'd probably be safe to deduct up to the amount of the fee. If you turn the shop into a loss because you didn't stay within the amount you were receiving for the shop, the IRS won't let you deduct anything because they take a dim view of people who are "in business" to "lose money."

So don't tempt fate. Anything you spend that you didn't have to spend (unless you're talking about an amount that is within the amount you received for a fee) is a personal purchase and should not be deducted.


And I *am* a tax accountant.

dspeakes – Thanks! That's basically the answer I was looking for. I appreciate your input.

I guess, here's another example:

I scheduled for a dine-in shop on a weekend. Unknowingly to me, I didn't realize the flat-rate fee for the shop didn't fully cover the meal. Based on your response, since I was dining with a guest, I would consider it a business meal and be able to deduct a portion of the overage? Note that this was with the absolute minimum purchase amounts.

Or should the overage be considered a personal expense (though, like you said, a business meal can be argued)?



Edited 1 time(s). Last edit at 10/19/2014 01:01AM by Tarantado.

A relative of mine was audited once. After the auditor was done
with their digging thru everything, the irs owed them a refund
in the thousands of dollars. They were told they would never
be audited again.

Lucky them. Gotta wonder why their tax preparer missed those thousands of dollars the first time. They probably used a CPA. I went behind a CPA once (well several times, but only once with this outcome) and they had overstated income by $100,000 and overstated the tax bill by over $20,000. So if that return had been audited before I amended it to fix it, he would have gotten a $20,000 refund on the audit. The error was quite easy to find, but I calculated that return seven different ways before I let myself believe he actually had made that large of an error. I thought sure I was overlooking something, but I wasn't.

Many CPAs are lousy tax preparers. It's a specialty in the accounting field, and not all of them specialize in taxation like I did when I got my degree. (Also many CPAs don't even do the returns themselves; office staff does them. You don't always get what you think you're paying for.)


Tarantado, the guest needs to be there for a business purpose, not just a guest like a date or your spouse or a buddy. In the case of fine dining, you are required to bring one, so that's your business purpose.

If you were required to bring a guest, but the fee/reimbursement didn't cover two meals ... it's a bad shop because you can't make a profit. You could do one of these the first time and deduct everything because you didn't have any way of knowing until you got there that it was of the nature of a discount rather than a reimbursement. You *can* lose money on a shop, but you can't set out to create a losing situation. So if you did it again, you couldn't say you didn't know. A second loss of this nature would probably be rejected.

This is where the difference between people who shop as a business and people who shop as a hobby comes in. The hobbyist is happy to get some free stuff or a great meal for free or almost free and isn't trying to pay the bills with mystery shopping. The person who is doing this as a business needs to be doing it with the intention of making a profit, not of generating losses to write off on their tax return.



Edited 1 time(s). Last edit at 10/26/2014 03:25AM by dspeakes.

So if I have a meal that is reimbursment only I should do another shop nearby to cover the milage with that shop fee?

That would be a good idea if you are putting your shopping income down as a business not a hobby.

dspeakes — Yikes, so from time to time I take on reimbursement only food shops with no fees to avoid having to cook at home. Sometimes I end up doing them without any additional shops in the route for fees. Should I NOT be claiming the miles driven for this assignment if I know I'll be taking a loss due to the drive to the restaurant?

What's unusual is that I'm not into mystery shopping for the actual money I'm making; I'm a mystery shopper mainly to subsidize and eliminate my normal expenses such as food. Yes, in a way, I'd prefer a profit, but I've even been aiming to just break even because the cost savings on food has been a great help for me since I became a mystery shopper. Should I be looking at how I take on assignments, or at least, understand what things to consider now in terms of what assignments to take and always aiming for a profit? It may be out of the question to consider mystery shopping a hobby for me since I've taken on so many assignments this year and my intent was essentially to save some money along the way.

The business versus hobby thing is something you need to consider up front because it affects the tax return.

Here are the scenarios:

As a business, if you make a profit over $400 you will pay Self employment tax of about 15.4% on that profit, plus it counts in with your other income and might be taxed at your regular tax rate depending on what else is on the tax return. But you'll pay that 15.4% even if your "taxable income" is zero. (You might have child tax credit or earned income credit to offset it.)

If you make a loss as a business, you will be able to deduct that loss against your other income, reducing your taxes.

So if you have a $1000 profit and have $30,000 in other income, you will pay $154 in SE tax and add that $1000 to the $30,000 for your regular taxes.

If you have a $1000 loss, you will pay no SE tax and you will subtract that $1000 from the $30,000 and only pay tax on $29,000.


If you are a hobby it's a little complicated.

If you have $5000 in income and $4000 in deductions, and make a $1000 profit as a hobby, you will not pay SE tax on it. The $5000 will go on the front of your tax return. The deductions will go on your Schedule A, itemized deductions. If you "break" the standard deduction, your MS deductions may offset the MS income. But if you are married, your standard deduction is over $11000 anyway. If you only had $6000 in other deductions (interest, property taxes, charitable donations, medical deductions) then you will not get the advantage of the $4000 deductions. You will pay tax on the full $5000 in income. (you would have had that $11000 standard deduction anyway)

If you have a loss (income was $4000 and expenses were $5000) then you put the $4000 on the front of the return, but can put no more than $4000 as itemized deductions. The other $1000 you paid out cannot be deducted. Again, whether that $4000 deduction actually offsets the income or not depends on whether or not you "break" the standard deduction.


This is why the record-keeping is so critical for us.

If I accidentally make more than $600 from any individual company, and they send me a 1099, I'll add that to me returns.

So you're announcing in a public forum that you cheat on your taxes? You do know that *all* of your income is taxable, not just what you get on a 1099?

dspeakes – Again, thanks for the explanation; the more I ask, the more complicated it's getting.

I think it's a good thing I brought up the topic. This is essentially my first full year of shopping (2013, I performed <50 shops during the entire year and made <$300 in fees; I ended up just stating I made the sum of my fees for 2013 as my additional income).

But this year's a bit different as I decided to ramp up with the mystery shopping cause I saw the benefit of the reimbursed meals, a reimbursed movie, a reimbursed night out at a bar, etc. Fee alone for 2014, I'm already at +$3,425 (this is the sum for all shops that were profitable ONLY). After accounting for reimbursement limit and subtracting overage from assignment fee, this sum works out to be ~+$2,915. The issue is that I never really consider this a second income as I focused on the perks of food, household expenses, entertainments, etc.

Regardless, I kept track on all applicable mileage, additional non-reimbursed expenses, etc. just to do it, even if I'm over-documenting.

I guess I'll continue the way I've been picking out assignments; I usually pick out a route that is profitable, after accounting gas, assignment fees and what reimbursements there are. I will just work closely with my tax preparer in a couple of months when tax season comes around and to keep all these factors in mind. Thankfully, I should be prepared as I've kept full, thorough documentation on every single assignment I've done. Sounds like my situation is a bit complicated the more questions I ask since I also have to account my mortgage and my full-time income .

I work for the government (not the IRS) and I cal tell you with certainty that there is NO SUCH THING as overdocumentation when dealing with the government. Keep EVERYTHING. You can always toss things later if you find through experience it is excessive, but you can't get something back if tossed. Even if you don't use all the documentation when you file taxes you will be happy you have in case of an audit. And while you many not think of MSing as a second job, the taxman certainly does and you don't want to end up paying more back in taxes then you have to.

Is all mileage deductible? If you only get $5 for a shop that you have to drive to, it's hard to show a profit if you write off mileage.

Linlam Wrote:
-------------------------------------------------------
> Is all mileage deductible? If you only get $5 for
> a shop that you have to drive to, it's hard to
> show a profit if you write off mileage.


But if you get a higher paying shop with lower milage it evens out. I am 600 miles for the year and $500 in fees. I am still ahead if I get a shop that is farther than the fee covers.

I want to show a profit, not lose money. So... Do I write off all the miles, some of the miles, or all the miles? Are all mile even deductible?

Every mile is deducted if it is driven to/from a shop regardless of how much the shop pays. Normally a person would not pick up a shop where the mileage is more than the shop.

dspeakes, I consider my mystery shopping as a second job for supplementary income to help pay the bills. I only take jobs that I can squeeze into my schedule, and I gross an average of $300/month. I started intentionally building my MSC base and filling my schedule in June, and I have earned about $1400 in fees and $256 in reimbursements so far. I prefer not to do shops with purchase requirements. I have done only a couple of reimbursement-only dining shops that I had to drive to, because the value of the food was worth the small cost of gas to me. In one case, the mileage was about 6 miles, and in the other, it was about 2 miles. If I understand correctly, I should not do that anymore if I want to present this as a business on my taxes? If I get the MSC to add a bonus that covers my mileage deduction so the shop is not done at a loss, then is that acceptable?

Okay, you guys are missing the point. This isn't about *showing* a profit, it's about *making* a profit. If you don't put cash in your pocket, what's the point?

I figure it costs me 40 cents a mile to operate my 40 mpg hybrid. The IRS lets me write off 56 cents a mile so that's what I use on my tax return, but I use the 40 cents a mile to evaluate if a shop is worth it or not. So if I drive 2 1/2 miles to make $1, I've only broken even -- no profit at all -- before I even start to consider compensation for my time. if I drive 25 miles to make $10, I've broken even, and I will have a loss on my tax return; the IRS will accept that I broke even in reality and am only showing a tax loss because of the tax laws. But where is the profit motive we're supposed to have if we are in business if all we're doing is covering the out of pocket cost to get there? You can't pay your bills if you work for free.

I'm not in this to break even. i'm in this to put cash in my pocket, but I also want to have taxable income, not because I want to pay taxes, but because I will pay *less* taxes that way. How so? Because if I turn my business into a hobby, I could lose a good chunk of the deductions. I don't pay much in mortgage interest so I don't break the standard deduction.

If I squeak out a $500 tax profit on $5000 of mystery shopping fees as a business, I'll pay $75 in SE taxes and $50 in income taxes -- $125. (I may have $2000 of that profit that stays in my pocket because I was able to deduct more than it actually cost me to drive the car. That's my cash flow. That's what pays the bills.)

If I am a hobbyist and have to put $5000 income on my tax return but only get to deduct $2500 because the other $2000 is used to get me over the standard deduction, I'm paying income tax on $2500 -- a tax bill of $250 in the 10% bracket. (Cash flow remains the same; it cost me the same to drive the car whether I did it for business or pleasure.)


The problem with the reimbursement-only shops is that you're essentially saying it's worth it to you to do your job of writing an evaluation because you are being compensated with a free meal. Guess what you just did? You just turned that free meal into taxable bartering income. You're saying the meal was your compensation for your work. Now instead of it being a breakeven proposition, you have $50 in taxable bartering income and *only* the mileage to write off against it. Not the cost of the meal. Just the mileage. Why? Because eating out is not a tax deduction unless it's a business meal, and if there's no profit motive, how is it a business meal?

Different story when you're being paid $5 to evaluate a burger at Jack in the Box. The purchase is necessary to obtain the items you need to evaluate, for which you are being paid $5. (you don't have to eat the food, just taste it; the meal may have no value to you at all)

In the case of a reimbursement-only fine dining shop, the meal is your only compensation. You're not being paid anything to evaluate it, except the meal itself. If you don't eat the meal, are you still going to spend half an hour writing the report later, just to get refunded for food you don't eat? If you don't eat the meal, you won't be reimbursed for it, your shop will be rejected. So you have to eat the meal to get the reimbursement, but the meal is your only compensation. You have no profit motive for this shop. So if you say this is a business transaction, you are bartering a meal for your report. It is now taxable. If there is even a $5 fee, everything changes. You're doing this to get the $5; the meal is a required purchase so you have something to evaluate to get your $5. Now the question is, did your gas outlay suck up that $5?

**But ..... there's another approach you can take: you can take the reimbursement as your fee, then deduct only 50% of what you paid as a "business meal deduction." That's fair and legal. You didn't profit from the meal your companion ate, only your own meal. So deducting the part that applies to the other party is okay, and now you have a profit for your shop (half the reimbursement) that you can write your miles off against. What you do with your profit is your business. For instance, you can use it to pay for your companion's meal. Which is what you did. You can deduct 50% of the total ticket, so if you "ran over" you also get to deduct 50% of the excess. For a $50 shop where you paid $60, you can deduct $30 as "meals and entertainment" expense, leaving only $20 as profit, and then you deduct your mileage from that. For the cost of $10 and the tax bite on the $20, you gave your spouse a lovely night out. That's a pretty cheap date.

That approach only works if you have a guest; if you are not entertaining anyone but yourself, the meal would not be deductible as a business expense, so in that case you would need there to be a fee in addition to reimbursement for your profit motive to hold up and it not be considered bartering. (Exceptions on the guest requirement if you are traveling 50 miles from home. But it's still only a 50% deduction.)


If you are a hobbyist, not in it for the profit, it's a different situation. A company can comp your meal to get your opinion; this does not create taxable income to you. But you can't write off the mileage to get there.


I'm sure I have confused some of you more than you were before because the thing you don't realize, that I realize because of my background in tax concepts, is that *intention* is a huge part of the tax law.

If you "intend" to make a profit, and act in a way consistent with that intention, you can write off losses that are inevitable when you are learning a new business and figuring things out. But if you only "intend" to get a free meal -- you are not a business and cannot write off the losses. If you are a dog breeder, you "intend" to make a profit selling those puppies; you can write off the food and vet bills and dog kennels and leashes. If your dog accidentally got pregnant and you sell the puppies, you didn't "intend" to make a profit. You are a hobbyist and can only write off the expenses up to the amount you got for the puppies, and only as part of your schedule A. Same action -- selling puppies -- but different tax outcome depending on your *intentions.*

Intention is not a matter of saying "I intended to do that;" it needs to be borne out by facts. Did you learn about dog breeding? Did you study the genetics of your breed, select breeding animals free of defect, do you refrain from breeding inferior pups? Or did you pick the dog because it licked your hand, bred it to the dog next door because you thought the puppies would be cute (or the dogs chose their own mates by digging under fences), didn't even know it was pregnant until you found the puppies in your closet?

Mystery shopping is no different, and the fact that you are on this forum supports that you are taking this seriously and trying to learn ways to be more profitable -- but not if you "try to only do reimbursement-only shops because you don't want to show a profit" or "don't write off all my mileage because I need to show a profit this year to justify my loss last year so they don't call me a hobby."

Each of us needs to decide what our intentions are -- freebies or income -- and plan accordingly for either hobby or business treatment on your tax return.

Think of it as "you can't write the mileage off against the reimbursed meal, only against the fee" and it might clarify things for you as to whether you are focusing on your profit motive or not.

Having said that, there is also value in doing a "free" shop to get experience, practice with a video recorder, or other reasons as long as you can connect it to a possibility of increased profit down the road. So a couple of reimbursement-only shops could be put on your tax return as part of your overall business activity, but if the agent sees that every month you're mystery shopping a fine restaurant with your wife in tow -- it's going to be hard to say that you took that shop to see what they were like and show the company the quality of your reports so you could get a bonus next time. You showed them that on the first shop; what purpose did the other six serve?


If you all take nothing else from this, I hope you get this: tax laws are complicated. The same transaction can have many different lawful tax treatments, depending on the circumstances and the taxpayer's intentions. This is why it is impossible for anyone here to give specific advice unless they have access to your entire tax situation. Get professional advice, and if in doubt, choose the method that pays the most tax. Yes. I said that. It wasn't a typo. Far better to be conservative and get a refund on an audit than to be too aggressive in the gray areas and end up paying taxes and penalties when the IRS tells you, no, you are not a dog breeder, you can't write off the garage the pups were born in as a tax deduction.


Sorry this went so long, but if I didn't address all the possibilities, you wouldn't realize how *not* cut and dried topic is.

If you want a conservative, generic answer that is safe for anyone to use, use the method described in the paragraph with the ** at the beginning.



Edited 1 time(s). Last edit at 10/21/2014 04:41PM by dspeakes.

dspeakes, thank you for the detailed explanations. I really appreciate it! I understand what you are saying about needing to set out to make a profit rather than reimbursements only. How should I account for the reimbursement-only shops I have already done? They were just me, no required guest. Do I take the reimbursement as a fee, and deduct only the mileage against it? Or deduct nothing at all? Since there was no additional fee it is all taxable barter income?

Another question: if the MSC adds a bonus to a reimbursement only shop, does the bonus count as a fee and give me a profit (provided the bonus amount is more than the mileage cost)?

From IRS Publication 463:

Self-employed. If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met.

•You have these expenses as an independent contractor.

•Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.

•You provide adequate records of these expenses to your customer or client.
In this case, your client or customer is subject to the 50% limit on the expenses.

Many of the reimbursement-only meal shops require the presence of a guest so this should apply to their meal as well.

(I am an enrolled agent with over 30 years tax experience.)

Edited 1 time(s). Last edit at 10/21/2014 06:26PM by JoR.

You do not have to break even or make money shop-by-shop in order to be considered a business enterprise. What the IRS is concerned about is that, in the aggregate (i.e. a tax year) you do not report losses more often than about 2-3 years out of 5. They do, indeed, understand that there may be years when start-up costs and/or the costs of needed equipment cause a loss at the bottom of your Schedule C.

BTW, I would not consider an MS dining shop to fall into the "business entertainment" category for tax purposes unless my guest was actually an MSer (and we discussed trade craft, marketing, etc.) or an MSC employee, scheduler or editor. The fine print in "business entertainment" indicates that you are promoting your business by entertaining someone in the industry or who advises you professionally (such as your business lawyer or accountant.) Taking a spouse or friend would not cut it for that category. "Making the fee or qualifying for the reimbursement" is not the sort of business purpose the IRS uses for that category. There ARE other expense categories to explore with a qualified tax advisor, but I have been told by several what I have stated here.

Thank you dspeakes, and every one who is giving proper information. This is my first year and I want to do it right. I asked for, and received my first mileage pay today. Excited!

Edited 1 time(s). Last edit at 10/22/2014 02:51AM by Linlam.

If these are items you would normally purchase and use any way and you didn't have to spend that much..a tax court would not be very happy with you trying to claim them as deductions..

if you have the option to return....the court would not be happy

you could probably justifydeducting small purchases that are not reimbursed or returnable....when you are only required to make a small purchase (or if does not specify a high minimum purchase)..

the only time I had a large purchase only minimally reimbursed was an eye exam/glass purchase...which was deductible under health care anyway....but in that case I was required to make the mimimum purchase that ended up being about $200 not reimbursed....with only a small portion being reimbursed

i would not try to deduct a high purchase unless you were required to spend that much..and you can't return it..