From: Houston TX
Dear Tax Mama,
My questions have to do with mystery shopping as a business. First let's
assume this is a legitimate business with the intent to make income. I want
to focus on what is income and what is not income.
Let me give you several examples and your opinion would be appreciated.
Example 1. I am paid a fee, plus meal reimbursement to mystery shop a restaurant.
My thoughts are the fee is income, but the meal reimbursement is not income,
nor is it subject to 50% limitation, since I submitted "accountable plan" type
info to be reimbursed.
Example 2. I am paid a fee and oil change amount as reimbursement to mystery
shop a lube shop. This is where I have difficulty in determining what is income
and what is not. Since I received a benefit from the oil change, is this income?
If the oil change is income, then why isn't the meal in example 1 income, perhaps
to the extent of the actual meal cost vs what I would normally have spent on
a meal?
Thanks,
Joe
Dear Joe,
Well, first of all, my friend, it IS a legitimate business.
I remember working for a movie theatre waaay back when the world was young.
And we employees were told to watch out for 'shoppers'...with little hints
on how to identify them. So this kind of service has been around for many decades.
Your questions are excellent. You've selected perfectly good examples. In
each case, you receive a benefit. And I could see IRS wanting to pursue that
angle.
However, what you're really doing is being paid to do research or be a detective.
I know that not everyone will agree with me. So, it will be interesting to
see the reaction of the Pros and the various folks at IRS. [Your feedback would
be most welcome.]
You are being paid to test the services and products for quality control
purposes and to write extensive reports on the result of each encounter.
Here's how I would approach this if I were defending an audit (not including
extensive research for precedents):
1) If the 'businessowner' was actually treating this as a business, with
a profit motive, designed to generate sufficient income to live on, I would
take deductions for 100% of the costs of the items purchased. Of course, I
would report 100% of the reimbursement as income.
2) If the 'businessowner' was not treating this as a business, simply as
a way to have some adventure, or to get paid to try out different things, and
never really makes a profit, or an insignificant profit - then, I would split
all the costs of things like the oil change for which you get a long-term benefit.
The meals? It doesn't make sense to treat that as meals and entertainment.
It IS research. So I would still deduct 100% of their cost
However, in all cases, I would not report meals as 'meals'. I would probably
report them as either research, or under cost of goods sold, on the 'Other'
line, as "reimbursed expenses".
Joe, if you're serious about doing this for a living, DO pay tax professional
for a proper, written opinion.
Ask TaxMama isn't designed to offer specific advice on tax law - just general
ideas - and to entertain and amuse.
Here are some sources of information:
Confero hires
shoppers and provides no tax advice.
Service Evaluation
Companyissues their reimbursement checks separately from their checks
for services rendered. It's possible that most companies do the same. As
a result, they issue their 1099s only for the services, not the reimbursements.
In which case, for tax purposes, you could simply report the income, and
related business expenses - and keep the reimbursements off your books, just
as an employee with an accountable plan would do.
But if you're ever audited - you'd better have a good record off all the
expense reports you turned in, copies of the checks you were paid for reimbursements,
and copies of the receipts you submitted. So keep them in a separate file for
at least 6 years after each return is filed. (IRS typically will open tax returns
for audit for up to 6 years if they think there was fraud.)
Do some research online - search Google for these terms: mystery
shopper tax treatment
It sounds like fun!
And you can actually earn a living at it - especially if you can combine
work from several companies in each shopping trip, or in each day.
Best wishes,
Eva Rosenberg, MBA, EA
