I did a reimbursement only shop lately. I was supposed to purchase a skin care product and get up to $40 reimbursed. However, any skin care product at this boutique is above $55. So I ended up spending $60 with tax. That is $20 out of my own pocket. I did not mind paying the extra $20 when I signed up the shop because I use their products anyway. Now I am just wondering can I claim the $20 when I do my income tax as a business related expense? Since the purchase is a requirement for this shop and the $20 expense is a must to do the shop?
I have done multiple shops like this in the past and never claimed the extra expenses. A similar question is how about casual dining shops which the reimbursement only covers the cheapest items on the menu. I often spent $10 to $20 more than the maximum reimbursement amount for those shops. $10, $20 here and there do add up over the course of one year.
Any suggestions?

I can understand getting 'caught' once having a purchase requirement that exceeds the reimbursement and deducting it as a necessary business expense on a 'live and learn' basis. I certainly would not make a habit of it. The same applies to casual dining. If I could buy the cheapest thing on the menu and stay under reimbursement I will not claim an unreimbursed business expense because I chose to do something different and exceeded the reimbursement. I have done a casual dining where the reimbursement did not cover the purchase requirements and I claimed the overage and have never accepted that job again. If I were to decide to do that shop again, I would not claim the overage because it would be a deliberate and knowing decision to take the shop as basically a 'discount' on dining there.

Reimbursement only or large reimbursement shops we do generally not so much as a business proposition as as a perk we wish to indulge in. The reimbursement is a tax exempt value to us. I do a lot of reimbursement only or small fee big reimbursement shops so I make sure that I do enough taxable fee shops during the course of a year to show a profit after all expenses. It is a business I am operating and a business should be showing a profit or IRS can decide it is a hobby and business expenses are completely disallowed.

@Fenicia wrote:

I did a reimbursement only shop lately. I was supposed to purchase a skin care product and get up to $40 reimbursed. However, any skin care product at this boutique is above $55. So I ended up spending $60 with tax. That is $20 out of my own pocket. I did not mind paying the extra $20 when I signed up the shop because I use their products anyway. Now I am just wondering can I claim the $20 when I do my income tax as a business related expense? Since the purchase is a requirement for this shop and the $20 expense is a must to do the shop?

Yes, you can claim the additional as an expense for taxes.

As to the dining question, I'd say that if you could have stayed under the reimbursement, but didn't, you ethically shouldn't claim the overage as an expense. I don't see the problem if you exceed the maximum reimbursement. As long as you don't use that extra to unfairly claim it as an expense.

It's like the post office shops--the MSC tells you you can exceed the reimbursement for postage, but you just have to pay for it yourself. So, you're getting a discount on your shipping cost. As long as you don't try to claim the additional expense against income, it's fine. Now, if you're shipping something for business and not personal purposes, that changes the situation, and you can claim the extra postage as an expense.

As long as there were items which you could have purchases for less than the amount of the reimbursement, you can not deduct the extra amount you spent. That was your choice, not a requirement. This topic comes up over and over again. Some will argue that the IRS is not going to notice, or call you on deducting the extra cost. IMHO, the IRS could. So, it is a matter of how much risk you are willing to assume. Personally, I would view it a nice discount and stop there.

I'm confused by this. I don't recall what I did 7 years ago when I used to shop (probably just considered it a hobby and didn't claim anything) so this will be my first time filing taxes using mystery shopping as a business. I freely admit that I could be wrong, but here's my logic:

If I run an office and I decide I need a new filing cabinet for my office, there is no IRS rule that says I have to choose the least expensive filing cabinet in order to deduct it as a business expense.
If I take a client out to lunch for a meeting, there is no requirement that I and my client have to order the least expensive items on the menu in order to claim it as a business expense.
If I am required to order a meal in order to evaluate a restaurant, and the company pays a flat fee and does not reimburse, why would there be a requirement that I order something that costs less than the fee, in order to claim it as a business expense?
If the company reimburses expenses up to a certain amount, obviously I can't claim the portion of the meal that they reimbursed as a business expense, but if I had additional expenses then why not?

The expenses only balance out the income that I make, in terms of tax liability. I'm not getting extra money from the government to pay for my extravagant meal, I'm simply not paying taxes on some of the money I earned from the meal that I paid for in order to evaluation the restaurant. What IRS auditor is going to say "Why did you order the salmon entree when you could have had the chicken?"

Yes, if you can prove it later on yes. Personally as a someone who prepares taxes, I'd leave it alone. I constantly come across this question. More time than not my clients get dinged for audits. And then their lives suck for years.

IRS has no requirement that says every business transaction must be profitable. If I call a carpet company for a quote on new flooring and they send someone out to work it up and I decide not to move forward, they have a loss on time, mileage and whatever forms/materials were used for the quote. If that carpet company goes out on 100 quotes a month and lands only one job for their efforts, they need to examine what is wrong with their business model and pricing.

I take the same attitude towards mystery shopping. If I am not making a net profit each month, there is something wrong with my business model, but not every shop needs to be profitable. A shop that loses money beyond simple mileage, needs to be examined carefully and good notes taken. Too many of them could indeed indicate to an auditor that I was not in business to make a profit. Repeating a money losing deal could confirm to an auditor that I was not in business to make a profit. ("Fool me once, shame on you. Fool me twice, shame on me."

I'm guessing this might be one of these "grey" areas, and may come down to what can be considered a "reasonable" expense. If you spend $20 over your dining reimbursement and claim that as an expense against income, is that going to be a problem? Probably not. If you spend $100 over the reimbursement and claim the expense, that might well be a problem.

I seem to recall my tax guy saying that there are limits (either "soft" or "hard," I don't remember), for example, on what you can deduct for meals while on a business trip. I'm guessing that if I spent $50 on lunch just for myself, that could well be a problem! But if I spend $15 or $20, I don't think that's an issue.

In the OP's example, there was nothing in the store that met the reimbursement amount, so I don't see any reason why the additional expense can't be deducted. The additional amount was necessary in order for her to complete the shop.



Edited 1 time(s). Last edit at 11/12/2015 03:10AM by BirdyC.

It has been a while since I looked at it, but IRS had a lot of information about meals on business trips and business entertaining, which are pretty irrelevant to shoppers except road warriors who can't find a reimbursed lunch or dinner.

The OP's example I would expect could pass muster as an unreimbursed business expense based on not knowing that the reimbursement would not cover any purchase in the store. But my sense is you get away with that once. I certainly would not do the shop again and deduct an unreimbursed expense now that I know the reimbursement will not cover.

I was just using the example of meal expense to underscore the "reasonable expense" aspect of spending more than the reimbursement. Not as an apples-to-apples comparison.

I am not sure which cosmetics job the op is talking about but I recently saw a job for a popular cosmetic counter that is in higher end department stores. The reimbursement level was $40. I looked at the website of the cosmetic company and saw that the only thing I could buy for under $40 was toner. I decided not to do the job as I can buy toner I like for a lot less and I do not use the brand and was not willing to go $20 out of pocket for a cream that I would be willing to buy if it were reimbursed. I noticed these jobs sat on the boards for at least a week while other skin care reimbursement jobs seem to fly off immediately. So, I am thinking other shoppers already knew the prices on this brand (if it is in fact the same) were in excess of $40. But my point is that if I could have purchased the toner and stayed under the reimbursement to me that is the same thing as I could have purchased the chicken at a high end restaurant and stayed under the reimbursement but since I got the steak it was my choice to go over and therefore the excess I spent should not be taken off as a business expense.
The issue is really will you or will you not get audited and then perhaps caught by the IRS. If you do and you have to produce all your receipts you may not want to chance that they look into the brand and find out you could have purchased an item that was $32. After that, depending on the agent, you might have everything gone over with a fine toothed comb for the next 5 years. I am not a tax expert but I really do not think writing off $20 is worth it if you then get audited year after year. There is always that chance.

If you can prove its a business expense, hit it. I can't prove the cosmetics I purchased last month are a necessary expense. They are, but trying to prove that to the IRS, isn't on my bucket list.

@MA Smith wrote:

If you can prove its a business expense, hit it. I can't prove the cosmetics I purchased last month are a necessary expense. They are, but trying to prove that to the IRS, isn't on my bucket list.

LOL!

Actually, in reality I kind of doubt the IRS is going to go check menu prices and go shop the local cosmetic counter to check to see if someone "could have" purchased something for less than $40, but spent $55 and claimed $15 as an expense. But if there's a clear pattern of overspending, which would become apparent after viewing one's complete income & expense records, then the IRS could assume that the additional expenses were being incurred expressly to depress profits. Now, that's a problem. A very big one.



Edited 1 time(s). Last edit at 11/12/2015 03:32AM by BirdyC.

If the OP is indicating that there was nothing in the boutique that would fulfill the requirements for the shop for less than $55 ($60 with tax), I am not going to quibble with that. What I personally would have done is irrelevant to the question asked, which was 'is the $20 overage deductible as an unreimbursed business expense'. In order to complete the shop, the OP is indicating that was the minimum possible purchase, and completing the shop is important in our business to building your reputation.

The chance of any shopper getting audited based on their Schedule C is slim. The personal knowledge that you did what was appropriate and fair to yourself and your fellow taxpayers is what is truly important--at least in my personal 'code of ethics'. If I am in a situation where I am blindsided with a reimbursement not covering, I will claim the overage that I can not do a darn thing about while still completing the shop, and I will sleep well knowing that I am trying to abide by both the letter and the spirit of the law. But if I choose to do the shop again, I need to plan that the reimbursement amount is merely a discount on my otherwise personal purchase.

Thank you so much for everyone's time and reply. After reading all the replies, I decided not to claim the $20 on cosmetic product. I do more reimbursement shops than fee shops, becuase I don't need to pay tax on the reimbursement. I don't make a lot of income from mystery shopping business when I do my income tax every year. If I started to claim this $20 here and there, then I may not have any profit from MS business on tax return paper. This would make my file looks more suspicious to the government and increases the chance for audit.

For the moment, I would note on my shop sheet that there was an unreimbursed $20 just to remind me when I went to do my taxes. If I could take the $20 and still have a net profit for my business, I would take it on a one time basis even if I continued to do the shops as a now informed shopper. If my net profit was $300 or less I would not. That is just me.

@Fenicia wrote:

Thank you so much for everyone's time and reply. After reading all the replies, I decided not to claim the $20 on cosmetic product. I do more reimbursement shops than fee shops, becuase I don't need to pay tax on the reimbursement. I don't make a lot of income from mystery shopping business when I do my income tax every year. If I started to claim this $20 here and there, then I may not have any profit from MS business on tax return paper. This would make my file looks more suspicious to the government and increases the chance for audit.

It's OK to break even or show a loss on a business! You don't need to show a profit every year. In your case, you legitimately incurred a necessary expense of $20; I don't see why you wouldn't claim it! But that's just me. I've been self employed for more than 30 years, and all of my tax professionals over the years have said, "Take everything you're legally entitled to." So, I do!

But you also need to show a profit I think it is 3 out of 5 years, if I recall correctly, for your 'business' not to be deemed a 'hobby' and therefore lose all business deductions. I was certainly glad for having shown annual profits when the recession hit because I indeed had paper losses for a couple of years there.

It is my understanding that the whole 3 out of 5 years is not a set in stone rule. What that is for is someone who has a hobby that they try to make a profit on to recover part of the costs of the hobby. Anyone who has a legitimate business that they can show there is intent to make money doesn't have to worry about it.

For instance, I love photography, so I've spent thousands on camera equipment. I could do a wedding here and there to recoup the costs if I wanted to, then deduct the cost of all that equipment, but I would need to turn a profit 3 out of 5 years in that instance or it would be deemed a photography hobby that I just got some income from.

My parents have owned rental property for most of my life. Their rental business did not turn a profit for many, many years, due to the massive deductions on property. They never had a problem with it being deemed a hobby because while it went years without turning a tax profit it was very cash flow positive. That made it easy to show that it was in fact a sustainable business.

I understand. I too have had rental properties that were losers for years primarily because of the required depreciation that of course needed to be reclaimed at point of sale as a reduction of cost basis and I have had other legitimate businesses, some of which could reasonably be expected to show a profit from day 1 while others a reasonable expectation would be 6-7 years. Most shoppers should about break even in year 1 and should be showing a profit thereafter unless they are adding on major equipment. And this of course does not address real value but net taxable income.

@bgriffin wrote:

It is my understanding that the whole 3 out of 5 years is not a set in stone rule. What that is for is someone who has a hobby that they try to make a profit on to recover part of the costs of the hobby. Anyone who has a legitimate business that they can show there is intent to make money doesn't have to worry about it.

Exactly what I've been told, too. In my current business, for example, I do it year round, full time. Even if I lose money five years in a row, I intend to make money, I can show that I'm endeavoring to turn a profit, and, some years, I show a loss only because of the legal mileage deduction.

I was curious about this too. In my case, I just did a grocery shop. I went armed with a list of things my husband asked for, both because I was required to ask six different people for help and it would be a good prop, and because we really needed those things.

I ended up spending more than I will be reimbursed for, which is fine with me because I needed groceries anyway. I use accounting software to track all of my expenses and now that I am mystery shopping, I am going to add a category for it, but I can't decide whether to put the whole amount or just the amount I will be reimbursed for in that category.

In my example, I am being paid $12 and reimbursed $12 for a total of $24. I spent $60 at the grocery store. So when I enter the $60 in my accounting software, would I put it all in the MS-Mystery Shopping bucket, or would I split it with Groceries, which is where I would put it if I weren't mystery shopping at all. And if I split it, would the split for MS be $12 or $24?

Here's what *I* do on those. If I am doing a shop that includes a reimbursement and I purposely go over said reimbursement, I only allot the reimbursed amount to shopping and the rest is a personal expense. For instance, I do a small chain of convenience stores with a $2 reimbursement. I'm sure I could find many things like candy or whatever for less than $2. I don't eat much candy, or even drink much soda, I am, however, completely addicted to Monster Energy Drinks (no I don't drink that many, like 1 every other day). Since I will eventually buy those anyway, and I'm not a big candy person, I always buy those and a single usually runs ~$2.50. On my spreadsheet I account for the shop fee, a $2.00 purchase, and a $2.00 reimbursement. The extra never shows up on the spreadsheet and only the income ends up being accounted for. Yes, I know some people think I should look around the store and find the very cheapest thing possible and also pay taxes on the extra $1.85 but quite frankly I think that's a big hot steaming pile of BS and don't do it.

Are you tracking income and expenses? You said "expenses," but I assume you're tracking income as well?

I, personally, would put $24 in the "gross income from mystery shopping" category, but you're also going to need to put $12 in the "mystery shopping expense" category. Then I'd put $48 in your personal grocery-expense category, because that's your net, "out of pocket" cost of groceries after your reimbursement. Unless you track your grocery expenses in order to budget for them on a monthly or weekly basis. Then I'd post $60, since you probably won't be doing a mystery shop every time you grocery shop! That will yield an accurate figure for budgeting, but not an accurate figure of your true out-of-pocket cost.

OK cool. Yeah I track ALL expenses, not just business expenses in this software. So even the overage will have to go somewhere, but I think it's cleaner if I put the overage in another category. The only thing is - I do this not just for IRS purposes but just for my own information about my spending. For example I have other hobbies that don't really bring in income, but I do sell things from time to time, like things I collect. So I have a category for those so that I can track how much I spend on them and how much I have recouped. I think for this purposes what I really need to do is create two new categories- MS-Mystery Shopping and MSU- Mystery shopping Unreimbursable expenses. My goal with mystery shopping is more just to support lifestyle purchases like restaurants, movies out etc. - I do have a full time job where I make a decent income, but I want to buy a home sometimes in the next year or two and I live in an expensive city. So I need to find some other way to pay for "fun stuff".

@BirdyC wrote:

Are you tracking income and expenses? You said "expenses," but I assume you're tracking income as well?

That's a good point. Yes, I also track income. But income and expenses can be in the same category.

Some example categories are:
Groceries
Gas
Rent
Yarny Stuff- because I crochet
Shopping- this includes any shopping that I do that's not in another category
Blog- I have a little blog

So- I would never have income in say the Rent or Gas categories.

In "Yarny Stuff" I might sell a scarf every once in a while so I would put it in that category. For Shopping, occasionally I turn around and sell a dress online or something when I am not wearing it. Neither of those two would be considered income because I am just selling my own stuff. So they might have debits or credits but not really any income.

But for my blog, I do sometimes take in some advertising income or something like that. I also occasionally spend money on something I write about, so I would put it in as an expense in that category. Like - Say I am reviewing a cookbook and I get the cookbook from the publisher but I go out and buy ingredients for a recipe.

My goal with mystery shopping is mainly just to break even so I am doing a mix of little jobs like cell phone shops and stuff so that if we are on a restaurant shop and we feel like going over, we can.

Sure you can take the deduction. But your bookkeeping must be EXQUISITE. If you're ever audited, IRS has come down HARD on small businesses, disallowing deductions that do not have actual receipts as proof of purchase. So don't throw away your paperwork, keep it as many years as the law allows for IRS audits. I believe if they think there's fraud or evasion involved, that's 10 years.

And I sure would NOT deduct the overage at the grocery store. Not required for the shop, and purely for personal consumption. It's just a personal expense in the "grocery" category.

In the first instance, there was absolutely nothing available for purchase below the reimbursement amount; at the grocery store, there are many things to choose from to keep below the reimbursement amount.

Edited 1 time(s). Last edit at 11/13/2015 02:29AM by ceasesmith.

@CeciliaM are you using YNAB software by any chance? That's what I use, and if it's groceries, gas, or something I would buy anyway, I split it into two categories--"Secret Shopping" for the reimbursable amount only. If it's an item that I'm purchasing just to prove the shop, overage on a meal, or an expense that I'll use for shopping, then I put it in the "Secret Shopping" category. I also place all my MS income into the "Secret Shopper" category so that I can see if I'm operating in the red or black.

@Alter_Ego wrote:

@CeciliaM are you using YNAB software by any chance? .

No, I use Clearcheckbook.com.

@Alter_Ego wrote:

... if it's groceries, gas, or something I would buy anyway, I split it into two categories--"Secret Shopping" for the reimbursable amount only. If it's an item that I'm purchasing just to prove the shop, overage on a meal, or an expense that I'll use for shopping, then I put it in the "Secret Shopping" category. I also place all my MS income into the "Secret Shopper" category so that I can see if I'm operating in the red or black.

That's kind of my overall goal with this - I don't want to get carried away and do a bunch of shops and go overboard spending money- it's been an issue with me in the past so this is supposed to help with that, not make it worse hahaha.

I shop at a very expensive restaurant twice a year as a mystery shopper. I outspend the reimbursement by $25 to $40, but am happy my companion and I can have an extravagant meal for that little out of pocket.