I went to see the person who usually helps prepare my taxes. He asked if there is anything new this year. I mentioned the MS activities as being new.
He is discouraging me from doing any reimbursement-only shops. He says those reek of hobby activity and my cost (the amount I seek reimbursement for) could be denied, since it lacks what the IRS looks for - work that is done as a profit-seeking activity.
Is this news to anyone? surely some of you here may have come across this before?
Have you had any issues with reimbursement-only shops?.
I thought I heard someone say that a tax advisor spoke at one of the IMSC conferences, giving advice on tax issues for MS.
Would love to contact that person, maybe see if they had a slide deck, I would be willing to pay for the consult.

Thanks

Edited 2 time(s). Last edit at 02/04/2018 09:25PM by BarefootBliss.

The tax folks who have spoken at IMSC conferences would totally disagree with yours. You perform WORK in exchange for something of value, which is not a hobby. In addition, in many cases, some reimbursement only shops are used to work your way up to qualifying for shops with fees. The problem would only arise if, in total, you had a few years of negative income on your Schedule C, where your MS income and expenses would and SHOULD be reported. The tax folks who have posted on the forum over the years say the same. You can choose either of 2 ways to deal with reimbursement only shops. The more complicated would be to declare all of the reimbursements as income and all of the expenses as expenses, resulting in zero net self-employment income from those shops. The simple way is to just ignore both the expense of that dinner and the reimbursement. Now, some here say that they do not take mileage for reimbursement only shops; that's a judgement call. Since I show an overall profit from MS each year, I take ALL of the mileage.

Also, if you are advised to report your MS income anywhere except a Schedule C, you may want to find a new tax adviser.

I don't know if it will help you but I saw a post in a facebook group about taxes. Here is the link. [www.facebook.com]

" The simple way is to just ignore both the expense of that dinner and the reimbursement."

Thank you for your helpful post. I think this statement may hit the nail on the head. This year will be my first, so I was not sure whether the amount of reimbursements appears on the 1099s from the MSCs as income? In other words, do the MSC report only fees they pay as income to the shoppers or also reimbursement as a form of income? I hope I am asking this clearly.

I will ask this question again - if anyone has a tax pro who specializes in MS guidance (even if not their full time specialty since I know it's not likely to be)...would appreciate the referral, by PM as well. I'd love to find (and pay for if necessary, a tax guide for MSing)

@BarefootBliss wrote:

I will ask this question again - if anyone has a tax pro who specializes in MS guidance (even if not their full time specialty since I know it's not likely to be)...would appreciate the referral, by PM as well. I'd love to find (and pay for if necessary, a tax guide for MSing)

You don't need a tax pro who's a specialist in mystery shopping, but I'd find one who's experienced in small-business taxes and accounting. Mystery shopping isn't all that different from any small business. You have income, expenses, and reimbursements. It doesn't matter that your clients are MSCs.

If you do a mix of shop types (fee only, fee + reimbursement, reimbursement only), you can, as walesmaven said, include reimbursements in your total gross income, then deduct the reimbursed amounts as an expense against income. Either way is fine; it ends up the same. Your Schedule C isn't going to reflect that some shops were reimbursement only, so I don't understand your tax person's statement.

It varies by MSC as to whether they include reimbursements on their 1099s. Their pay statements break it down, though, so if you keep electronic or hard copies of those, it should be pretty easy to total your numbers by category and have a tax pro advise you on the best way to report.

OP, this question makes me bonkers every year as a former tax preparer. I apologize upfront if I come off snotty; it isn't directed at you. It is because as a former tax professional, your question was an every day occurrence and made me nuts. Reimbursements are what they are. You spent money and you were reimbursed for what you spent. You did not make any money on this shop. It should not be reported on a 1099. Unless your spend is significantly higher than your reimbursements, do not report them. When your spend is big money, you may need to keep track of reimbursements.

Mileage is a different story. I told all of my clients to keep track of their miles no matter what. If I could use the mileage to help them, I did it. My clients would show up with shoe boxes of receipts so I could figure out their business mileage When I haven't made enough to justify my business mileage, I take the personal mileage for the deduction. I've had to purchase new equipment in the last few years. I take the immediate deduction for equipment and let my mileage flitter about until I see my bottom line.

One thing you do not want to do is show a loss. If the IRS comes back and says this is hobby income, you're a done deal. If the IRS decides you're a hobbyist, it's virtually impossible to turn it over to business income. Will you have to pay more in taxes? Yes. Do you want to pursue this as a valid income stream? if the answer is yes, bite the bullet and pay the government for a slight profit. A good tax professional will work with you and get you the best deal they can. They need repeat clients.

The best way to keep track is set up a spreadsheet. Don't worry, if you think you have too much information. As a former tax professional, I loved too much information if it helped me get my clients the best refund or the least amount they needed to pay on 4/15. Then again, I didn't charge my clients for the extra hours, your tax person might. My CPA loves my spreadsheet and workbook. She can find anything that she needs without having to call me. It did take her years to figure out my system.

Why do I have a CPA, now? The family business has become bizarre and we need her to make sure everyone is on the same page.

The advice you received was flat out wrong from what I read in your post. Find someone else. No you do not report reimbursements. It's not income. It's money you spent and someone repaid you.


MA

Thank you, not snotty at all.

Really, my initial assumption was that reimbursements should not be claimed as income (since they are actually based on expenses) BUT if the MSC elects to include the reimbursed amount as income on the 1099 - what to do about that. (?)

Thanks again.

If the MSC is including the reimbursement on your 1099 then they are making the mistake. Ask for a revised 1099. I don't do enough reimbursed only shops to worry about the income. Last year I may have had $50 in reimbursements.

You also should not have anything that is listed as expenses included in the 1099 numbers. When I first started a MSC gave so much for gas per shop. That was listed as special expenses. It was not included on my 1099 and I didn't take the mileage on the schedule C.



Edited 1 time(s). Last edit at 02/17/2018 11:13AM by MA Smith.

The fact that a few MSCs may err and include reimbursements on your 1099 is a VERY strong reason to keep meticulous records of your own concerning what was a fee and what was a reimbursement for each and every payment received.

@BarefootBliss wrote:

Thank you, not snotty at all.

Really, my initial assumption was that reimbursements should not be claimed as income (since they are actually based on expenses) BUT if the MSC elects to include the reimbursed amount as income on the 1099 - what to do about that. (?)

Thanks again.

I understand your concern. Most of the MSCs I deal with do not count reimbursements as income for the 1099. Regardless, in my case, I have income from a few companies that don't send in 1099s. Therefore, I report income which is higher than my 1099s added together.

@MA Smith wrote:

One thing you do not want to do is show a loss. If the IRS comes back and says this is hobby income, you're a done deal. If the IRS decides you're a hobbyist, it's virtually impossible to turn it over to business income. Will you have to pay more in taxes? Yes. Do you want to pursue this as a valid income stream? if the answer is yes, bite the bullet and pay the government for a slight profit. A good tax professional will work with you and get you the best deal they can. They need repeat clients.
MA

You don't want to risk the hobby business designation, but MA, aren't start-ups allowed a certain number of consecutive years in which to show a loss? Three last I knew, but maybe has changed. Few new businesses are profitable in the first year--with equipment purchases, marketing costs, (typically) a small client/customer base. etc. The OP said this was her first year, so she's probably not going to make a profit--if she counts all of her legal deductions/expenses.

I lost money in the first years of two of my self-employment endeavors, but had meticulous records for everything. It was never a problem tax wise. Since then, in some years I have a profit, and some years I don't. In some years I have a profit until I take my mileage deduction. It's sporadic, but in more than 30 years of having self-employment income, I've never been audited or classified as having a hobby business. Plus, my tax guy is very good (specializes in small businesses). E.g., he expenses computers, digital cameras, etc. over time so that I don't show huge expenses against sometimes meager income. Some self-employed folks might be tempted to take those expenses all in the year incurred, and that could be a problem.

I scratch my head when people fail to report ALL of their self-employment income (even if not on a 1099) and ALL of their self-employment expenses. Unless they reach the point of risk as a hobby business, and then it makes sense to absorb some expenses and show a profit or break-even point.



Edited 1 time(s). Last edit at 02/17/2018 04:15PM by BirdyC.

Yes, start-ups can file Schedule C with a net loss without drawing undue attention. You might get an inquiry letter from the IRS, but that's easy to reply to. When I started selling residential real estate I had a couple of negative income years and never heard from the IRS. YMMV

@walesmaven wrote:

Yes, start-ups can file Schedule C with a net loss without drawing undue attention. You might get an inquiry letter from the IRS, but that's easy to reply to. When I started selling residential real estate I had a couple of negative income years and never heard from the IRS. YMMV

Same here. In fact, my first self-employment gig was selling residential real estate (oh, I bet we could share some stories--LOL). I lost money the first year, and maybe the second. I was worried about the IRS, but my CPA asked me, "Are you out there trying to get business?, Are you intending to make this profitable?" As long as I was and could prove it, which I could, no problem. Never got an IRS letter, either.