dspeakes, In response to your posting on 2/26/15 at 12:53 pm.
You request that I “please don’t nitpick” but it feels like that is exactly what your response did. I did not mention anything about reimbursement-only shops. I specifically stated, “…a shop with a fee paid.” And I have no interest to weigh in on the issue of reimbursement-only shops and their potential as barter income.
You correctly state that “cost of goods sold pertains to the thing you sold.” When you are purchasing a meal or other item in the process of a shop, you are not selling anything. No entry should be in the cost of goods sold section of Schedule C unless the taxpayer is selling a product. A service-oriented business, such as mystery shopping, would not have any cost of goods sold.
Indeed, the net income is the most important amount, though I believe it is also important to follow the guidelines to get to that net income. Comparing it to mystery shopping – The end result may be to interact with an associate and get a business card or receipt. Does that mean the guidelines should be ignored to get to that end result? I doubt any MSC would agree with that.
Even if a tax return is prepared in conflict to tax guidelines, chances of an IRS audit are low. However, cost of goods sold in a business that doesn’t sell product or large amounts of returns and allowances could be potential audit triggers. If one chooses to include reimbursements in income (or must because the MSC included it in the 1099), listing an expense category of “reimbursed expenses”, “necessary product purchased for evaluation”, or whatever one wants to label it, is in my opinion a much cleaner, straight-forward approach.
I appreciate that you are taking your time to inform others on this forum about taxes. However, if your goal is to teach non-accounting people an easy way to understand taxes, I would respectfully suggest that using gross receipts and gross income to mean two different things in your explanation is not making it easy but is only complicating the conversation. I would propose that most individuals conducting mystery shops are not concerned with financial accounting, but only accounting for tax purposes.
You referred to me as an IRS auditor. I was not. I wrote that I have IRS audit experience. To clarify, I represented clients in IRS audits and appeals.
You seem to have taken offense to my attempt to educate others on this topic and clarify what I believe to be the proper application of the tax laws. That is unfortunate because it was not my intent to offend you or anyone else. You were not the only person who wrote comments about whether reimbursements should be included.
Taxes are complicated and I am enjoying being retired from that profession. Each person can choose the way they wish to prepare their tax return. Unless I am signing the return as the preparer or the taxpayer, it is of no consequence to me.
Happy shopping everyone and have a good weekend!