Deducting reimbursed expenses

Just wanted someone to clarify the terminology everyone uses as it relates to tax preparation (doing them right now grrrr).

Reimbursed "expenses" (cash out of pocket to perform shops) are not truly "expenses" as this income should not be reported.

When you work for an employer and they reimburse your out of pocket expenses (travelling, meals, whatever), they pay you in a separate check that is completely separate from your tax reporting. You never report that as income, because it isn't, it is just a wash.

Unfortunately most of our MS will not / do not separate reimbursement income from true income and we have to do that manually. The confusing part is when you get a 1099 that shows you received X amount of total income when it really isn't
all income - that "non-income" dollar amount then has to be taken off the bottom line - total miscellaneous income being reported.

It feels like you are taking an "expense" deduction - but you really aren't (there is no line on your return for this) you are just correcting the incorrect total income reported.

It can get very confusing at tax time.


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Please go to the New Mystery Shoppers area and read the tax advice there concerning this very matter. AND?OR click on the link right below your post for more discussions. This is a very frequent topic here.

Based in MD, near DC
Shopping from the Carolinas to New York
Have video cam; will travel

Poor customer service? Don't get mad; get video.
The correct terms are "revenue" and "expense." "Income" (or loss) is the result of revenue minus expense.

Maybe that will help you understand? Yes, only the fee is "income" but the reimbursement you got is part of the gross revenue. When you deduct what you spent from that, you are left with the same "gross income" that you would have if you didn't count the reimbursement or the initial outlay in the computation at all.


$5 fee, $20 reimbursement shop.

You can call $5 the income and ignore the rest and pay tax on the $5.

Or, you can call $25 gross revenue, deduct the $20 somewhere (I use the "returns and allowances" line; you can put it on cost of goods sold or just claim it down below as a deduction, it really doesn't matter much where you take it) and pay tax on the $5.

Either way, you're paying tax on only $5.

And it really, really doesn't matter how you get there.

The reason I claim everything I get paid as Gross revenue is because that figure will match up with the sum of the bank deposits I have. It will match or exceed what my 1099's add up to. The IRS likes to see that you are putting all your money on the tax return. It's far better to argue with them about the validity of what you deducted from that figure than it is to argue with them about why your 1099 from an MSC said they paid you $1250 and you only put $1200 on the tax return. By putting it all on the tax return, you don't have to explain anything. It's all right there for them to see.

Time to build a bigger bridge.
People talk a lot about 1099s matching up but that may be the first time anyone has mentioned the total amount reported matching up to bank deposits. It's a good one.

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I went through an audit with a corporate client and one of the things i had to do was reconcile the total bank deposits against total sales income. some deposits were things like refunds from purchases, a couple were COBRA health insurance payments made by former employees, things like that. Anything I couldn't explain (and there were a few I did not know what they were for) became income. The burden is on the taxpayer to prove why it's not income, it's not on the IRS to prove that it is.

Nightmare of an audit. Learned a lot. dropped that client a year later because i simply could not get them to do the bookkeeping correctly.

Time to build a bigger bridge.
If one is using TurboTax as their preferred software, go to Miscellaneous Expenses area and type in 'Required Purchases' or some other rational explanation. Then list the amount reimbursed.

Not an original idea. I saw this in a Googled search of 'How to report reimbursements on schedule C'.

You will find a lengthy thread discussing handling of reimbursements on the tax return back in February. It is entitled, “Casual Dining, taxes, and Schedule C.”


With so many postings on this forum, no one is going to remember everything stated. So just to clarify -- my posting on February 26 did previously address the issue of bank deposits. It read:

"As far as needing to match bank deposits with gross income in the case of an audit, your accounting records should clearly list the reimbursements and the fees paid for the job. Totaling those two amounts should equal your bank deposits and that should satisfy any reasonable IRS auditor."

Have a good day!
Thank you for this - you just saved my life. I have been worried sick and running out of time. I couldn't for the life of me figure out how to do that in Turbo Tax. Thank you thank you thank you!

@Tatjana wrote:

If one is using TurboTax as their preferred software, go to Miscellaneous Expenses area and type in 'Required Purchases' or some other rational explanation. Then list the amount reimbursed.

Not an original idea. I saw this in a Googled search of 'How to report reimbursements on schedule C'.
I'm a former tax and accounting person so let me bring this up a notch. There are many good questions above and many attempts to answer. I can relate to the audit experience mentioned and the audit is a special situation of, if you will, tax return quality control. If you get called to an audit that focuses on your income, it is what you would have to face. Not all tax audits examine the income. The discussion on this thread has a basic goal, of simultaneously reporting the right thing the right way and avoid an audit of your reported income.

The 1099, if you get one or more, is the "information return" filed by the payor to the IRS and you get your own copy. Once you see this hierarchy it may become clear. The IRS is looking for you to report to them what was, and this is at least, on the 1099. If they sniff that you are not reporting income that is not associated with a 1099, they will possibly pursue an examination of your income hence bank deposits. If you are caught into one of these types of audits you are vulnerable to charges of tax evasion. In other words, bend over backwards to prevent it. The OP asked about how to handle reimbursements. First, you should know that you are filing a Schedule C.

Every expense that is reimbursed gets reported there as an expense which reduces the profit of the business. Get to know this Schedule. Get Publication 34 free from the IRS office or order it free.

Turbo Tax can't teach you but the publication can. Taxes are annoying but they aren't hopeless. I wish you luck.
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