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.
Time to build a bigger bridge.
Edited 1 time(s). Last edit at 10/21/2014 04:41PM by dspeakes.