ok, 2011 was my first year mystery shopping and it was only part of the year. i filed a schedule c and ended up with a small net profit (under $400). but, for 2012, it is looking like i am going to have a pretty large net loss. it's all because of the standard mileage expense. I drove a LOT of miles this past year. my net loss is just over $2000. i'm worried that this might trigger an audit...should i be concerned???

My net loss was $12,000. Yes you do open yourself up to a higher chance of being audited but if you can prove you did the miles then you have nothing to worry about.

As far as the miles are on your vehicle, what triggers a red flag is if you drove around 15,000 miles total and you claim 12,000 of those as business miles and only 3,000 as personal with no other vehicle available to you.

They look for a certain percentage as business and the rest as personal. If it is under that percent, you won't trigger a flag.

Snuffy, you are entitled to claim all your mileage and other expenses against your gross income from mystery shopping, but there may be some reasons you wouldn't want to do that. You can research any tax question at IRS.gov. I'm not qualified to give you tax advice but I would like to make some comments that may be helpful.

If you show a loss several years in a row, the IRS may decide that your mystery shopping business is a hobby and if they do that, they will disallow all expenses and you will be liable for income tax on the total gross income. I have never heard of this actually happening to anyone, but under IRS rules they can do this. It's possible. And - they might also be able to go back and collect previous years. If you don't make enough from all your employment and business ventures to owe income tax even if you lost the right to deduct the expenses, this would not matter to you.

If you are offsetting other income by a loss from your mystery shopping business, this gets stickier. Any large side business loss that offsets W2 income is a red flag. You can avoid offsetting W2 income by not reporting all your expenses so that you reduce your loss to a small number.

Another issue is that if you are reporting mystery shopping income totals, either positive or negative, that affect the earned income credit by increasing the amount of the refundable credit that will also raise a red flag. If your age or income levels make you not eligible for the earned income credit, then this is not an issue for you.

My understanding is the IRS is looking for a reasonable expectation of making a profit and appropriate efforts made to try to make that happen. If you're not trying to make a profit, why are you in business? If you're not covering the operating expenses of the car (about half of the mileage deduction) why are you doing the shops in the first place?

Don't answer ME, but you would have to answer the IRS those questions if you were audited. $2000 is a big loss but not unreasonable for a startup situation. But you need to have some kind of plan for how you will become more profitable in the future.

I only booked a loss for 2012 because of a few hundred dollars in equipment I bought (recorder, printer, smart phone, scanner). I won't have those expenses in 2013 and I am careful about making sure my car expenses are covered for all shops I do. I simply do not shop at a TRUE cash-flow loss. If the only reason you have a loss is because the IRS allows a bigger deduction for the car than what it actually costs you, they shouldn't hold that against you. But if you have a loss because you're driving 100 miles to make $5 on a FF shop . . . I think they will definitely be questioning your profit motive!

thanks everyone for the replies. i think a big part of the reason for the loss is that many of the shops i do provide reimbursement rather than a shop fee. many of them are grocery shops. in my mind, the reimbursement is money that i'm making because i just do my normal grocery shopping. but, obviously reimbursements aren't counted as income for tax purposes. last year i had a small gain, this year a loss...i guess i'll adjust in coming years to make sure i show a gain in 3 out of 5 years.

I seldom do any personal errands without tacking them onto a shop trip, or in my earlier life, a real estate business trip. Since the detour is less than a mile ot two, IRS regs permit me to report that entire trip as business mileage. So, for evey year since 1989, more than 90% of my miles have been legitimate business miles. Never had any questions from IRS about this. However, until 2 years ago, I was depreciating my cars, rather than taking the standfard mileage allowance. This year I may have to pare back on how much of my actual business miles I claim on 2012 taxes, since I need to show a healthy profit so I can qualify to refinance my mortgage.

Since my car gets about 37-39 mpg, was bought used (lower depreciation for me) and is repair-free, it actually cost me far less to run it than the allowance.

Walesmaven Can I ask what kind of car you have that's awesome mpg.

I drive a 2008 Honda Fit. On the road I average 37-39 mpg. In town it's more like 32-34. Both of those are higher than the EPA rating. In addition, it seems to be just as efficient with the AC running full blast!

And, it was rated by consumer Reports in 2011 as the most reliable used car in its size class. It continues to get similar ratings as it ages.

I love Honda vehicles...