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 Reimbursement - Is It Income?
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A_Green
Member

Oklahoma
USA
33 Posts

Posted - 08/14/2003 :  10:37:25 AM  Reply  Reply with Quote
Hi all,

I did a search in the archive and on the IRS website, but didn't find an answer...thought some of you might know.

Is reimbursement for your expenses considered income by the IRS? It seems to me like it shouldn't be, since it was already your money, but a company borrowed it through your purchase (does that make sense?)

For instance, if I have a shop that pays $20, where $10 is the shop fee and $10 is reimbursement for my meal/movie/whatever, do I have to count the whole $20 as income, or just the shop fee of $10?

I'll appreciate any and all thoughts on this, even if the answer is disappointing. Thank you in advance!

A. Green

Shopping Texoma (Madill, Kingston, Tishomingo, Ardmore, Durant, OK and Sherman/Denison, TX) since May, 2003

.Dawn DE
Inactive

DE
USA
518 Posts

Posted - 08/14/2003 :  3:05:34 PM  Reply  Reply with Quote
As an independant contractor, you should file a Schedule C, where you claim business expenses as a deduction of income. Since the cost of the meal is a necessary requirement of the job, you could claim the cost of the meal as an expense and the reimbursement as pay, and they would cancel each other out. I simply treat it as a "reimbursed expense", claiming neither the expense of the meal nor the reimbursement. Many MS companies will break down reimbursement and pay either on your stub or on their site (if you have access to it), but I keep a spread sheet where I total them in separate columns for tax purposes.

Dawn
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SharonInCO
Valued Contributor

Conifer, CO
USA
218 Posts

Posted - 08/14/2003 :  3:38:47 PM  Reply  Reply with Quote
I have a spreadsheet where I keep the running totals. I just started mystery shopping in October of last year so didn't have much income for last year's taxes. I DID, however have quite a bit of expenses from last year that weren't reimbursed until this year. I claimed the expense last year, planning on showing the income this year.

I didn't have enough income from any one company to get a 1099 so I believe that I'll have to wait and see how some of that shows up. If I get a 1099 that only reflects the fees, not the reimbursement, then I'll probably do like Dawn and not claim either for that company. If a company includes the reimbursements on the 1099, then I'll show it as both an expense and an income. I believe that there are separate lines on the Schedule C for this.

A good source of tax information is "Cathy's Corner" on Delphi Forums - she has a tax preparer, Sharon Riley, that posts fairly regularly about tax issues.

Sharon
MSPA GOLD Certified Shopper
Shopping the South and West suburbs of Denver
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Peter T. Sanderson
Valued Contributor

Pawley's Island, SC
USA
150 Posts

Posted - 08/14/2003 :  4:13:47 PM  Reply  Reply with Quote
The reimbursement is always income. The question is whether or not the purchase is an expense.

If the purchase is an expense, then
The reimbursement is income which is offset by the purchase and the net on your taxes is $0.

If the purchase is not an expense, then
The reimbursement is income and you pay taxes on it.

When is the purchase is an expense?

If I am being forced to buy something I would not have otherwise bought - then that is an expense. But if it something I need (like gas) then the income should not be offset by the purchase.

It gets more grey:
What if it costs more than I would have otherwise paid? I get a $10 bottle of vitamins at an overpriced chain that I know I could have gotten elsewhere for $5. The extra $5 is clearly an expense whether or not I needed the vitamins.

Keep good records of what you buy and what you do with it. THEN - See an accountant.
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.Dawn DE
Inactive

DE
USA
518 Posts

Posted - 08/15/2003 :  07:28:06 AM  Reply  Reply with Quote
From IRS Pub 334, Tax Guide for Small Businesses:

"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary."

I take this to mean that your expensive meal is deductible in the entirety, due to the MS company requiring 2 adults who order an appetizer, two entrees, etc. The meal was a necessary expense, and common practice in MS. If payment is made in addition to the reimbursement, that is obviously pay. Either way, mileage is deductible. Also, since a required purchase at a store is also "ordinary and necessary" as a requirement of the job, this too is a deductible business expense, offset by the reimbursement. If you go over the reimbursement and it comes out of your pockat, I would not consider it deductible, unless it was office products or something that you needed to run your business.

No matter who does your taxes, you, a service, or a CPA, make sure you know where the info came from. Read the regulation yourself or ask questions of your preparer to know where they got their information from. Even IRS regs are subject to interpretation. Keep detailed records and have a well thought out reason for why it is the way it is on your return, and be consistent from year to year. Last of all, remember that free advice is worth exactly what you pay for it.

Dawn
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SherryShopper
Star Contributor

Orlando, FL
USA
490 Posts

Posted - 08/24/2003 :  07:35:23 AM  Visit SherryShopper's Homepage  Send SherryShopper an AOL message  Reply  Reply with Quote
Okay, now I am trying to cover this so I fully understand what I can and cannot deduct.

I am Required to make a purchase at someplace I don't shop, and buy something I don't want. I receive my shop fee which is income (right?), and because my purchase amount is below the reimbursement amount, that purchase is a deduction, right?

Now what if the same scenerio happens but I spend $20 when the reimbursement is $10, and I couldn't find anything cheaper to buy? Is my entire purchase a deduction? I didn't want it, but I had to make a purchase.

Please help me to fully understand this. Thanks so very much!

~*~ Sherry ~*~
sfox@yourwebness.com
MSPA Gold Certified #bzxeut
Shopping:
Orlando, FL and surrounding areas
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.KenInSac
Inactive

Sacramento, CA
USA
104 Posts

Posted - 10/18/2003 :  3:55:59 PM  Reply  Reply with Quote
The issue of whether reimbursed purchases can be deducted or not still bothers me. For one thing, there are several different categories, as I see it:

1. Complete reimbursement of a purchase for a job that also pays a fee.

2. Partial reimbursement of a purchase for a job that also pays a fee. By this I mean, a small purchase (e.g., $20) that is mostly reimbursed (e.g., $15).

3. No reimbursement of a purchase for a job that pays a fee and requires a small purchase (e.g., $3).

4. Complete reimbursement of a purchase for a job that does not pay a fee (i.e., a reimbursement-only job).

5. Partial reimbursement of a purchase for a reimbursement-only job. As with #2 above, it's a relatively small purchase and a nearly total reimbursement.

There may be other types, but these are the ones that I've run into so far. The ones I have the most trouble with are #4 & #5. If you're not being paid a fee at all, it's tough to see how you can claim a deduction for your entire compensation. In effect, it's like making tax-free income. OTOH, clearly you're not being paid cash income, so it isn't as valuable as cash would be (since you've already spent it).

Ken

Ken
MSPA Gold Certified Shopper
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.Dawn DE
Inactive

DE
USA
518 Posts

Posted - 10/18/2003 :  4:52:32 PM  Reply  Reply with Quote
I recently had to read IRS Publication 463 "Travel, Entertainment, Gift, and Car Expenses" for a class (50 pages of dull), but, I came across this buried on pages 30-31. Under the heading "Rules for Independant Contractors and Clients":

"You are considered an independant contractor if you are self-employed and you perform services for a customer or client. If you received a reimbursement or an allowance for travel, entertainment, or gift expenses (note: meals fall under entertainment for the IRS) that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you DO NOT account to your client for theses expenses, you must include any reimbursements in income"
It goes on to say that you must keep records , and that if you DO NOT keep an accounting and seek reimbursement, then the expenses fall under the 50% limit. I take this to mean that a reimbursement only job is as described above, an expense incurred on behalf of the MS company (our client), and that we are reimbursed by providing an accounting (our receipts).

As for a required purchase that's only partially reimbursed, it depends on whether I was required to go over the limit (I had to purchase this particular item and it was more than the reimbursed amount) or I chose to purchase an item that was more than the reimbursement. For example, if a company gives me a $53 dollar max reimbursement for a restaurant that requires two entrees, an appetizer, etc , and I chose to bring along a third person and spent $75, I would not count the additional expense, but call it a wash. However, if my partner and I ordered the cheapest entrees and appetizer available to fulfill the requirements of the job and still went over, I would treat the extra as a business expense.

Dawn
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.KenInSac
Inactive

Sacramento, CA
USA
104 Posts

Posted - 10/18/2003 :  5:43:43 PM  Reply  Reply with Quote
Thanks, Dawn, for that information. I especially like how you suggest treating partial reimbursements. As for reimbursement-only jobs, I seriously doubt the IRS was considering mystery shopping when they wrote the text you quoted. There may not be rules regarding how to treat that situation, in which case, one has to go with whatever is written. Or it could be addressed in some other publication, or deep in the bowels of the IRC.

Ken

Ken
MSPA Gold Certified Shopper
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.Dawn DE
Inactive

DE
USA
518 Posts

Posted - 10/19/2003 :  06:40:33 AM  Reply  Reply with Quote
I agree, Ken , that the IRS did not have our profession in mind with this regulation. Until they come out with "Schedule C Guidelines for Mystery Shoppers", it's up to us and our preparers to take what is out there and make it work the best we can. That's why there is so much debate. The IRS cannot forsee all posible situations, and has been known to change their mind when challenged. A few years ago, they disallowed home office expenses for an anesthesiologist because it was not where he performed his primary work. He was an IC who worked in various hospitals, but did not have an office anywhere but home to do his scheduling and billing. He challenged it and won, now the language has changed to include these activities as allowable. I would hate to see one of us audited to get some clarification, but that's what it may come down to.

Dawn
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CarolShopsNTX
Valued Contributor

Dallas, TX
USA
143 Posts

Posted - 12/16/2003 :  08:50:00 AM  Reply  Reply with Quote
How do mystery shopping companies usually consider compensation for reimbursement-only situations? Do different companies have different policies? If my job is to eat a meal and I receive no other compensation, is it reported as income?

I am especially interested in the very high end meals. (I won't call them fine dining because a steak house is NOT fine dining!)...

I have asked my scheduler and not gotten a satisfactory answer.

Experienced folks out there, let's hear from you!

Shopping North Texas and sometimes Central Colorado! MSPA Gold
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ShaunaInOregon
Valued Contributor

Canby, Oregon
USA
231 Posts

Posted - 01/21/2004 :  3:35:47 PM  Reply  Reply with Quote
I would also love to know the answer to this question Carol! I'm looking at all of my pay stubs and I cannot believe how many reimbursement only shops I did!

Anyone have an answer?

Shopping the Portland and surrounding areas.

MSPA Silver Certified Shopper
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.Nicole
Inactive

Burnsville, MN
USA
144 Posts

Posted - 01/21/2004 :  4:15:44 PM  Reply  Reply with Quote
I have been reading a lot of books and publications and talking to CPA's and even if it is reimbursment only you have to claim the income and then it is then expensed and it is a wash. Some reimburments are not expensed. These include things that you would normally need, such as gas and groceries. That means that if you have a gas station shop that pays $5 in gas and then a $10 fee you have to claim $15 in income and the $5 in NOT expensed because you would have needed it. I hope it helped and that I understood correctly!
I am not a tax professional so please check my advice!

Shopping Minnesota
Gold Certified lmfgsr
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VickiA
Star Contributor

Rapid City, SD
USA
845 Posts

Posted - 01/22/2004 :  5:33:51 PM  Reply  Reply with Quote
What about the shops that are only a "fee" but you are required to purchase something? How would you report that? For example: Shop XXX pays $15.00. I am REQUIRED to purchase something. I purchase something for $1.98. How does that add up?

Silver Shopper ID# 3akxzg Shopping Rapid City South Dakota and surrounding areas!
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Deanna
Contributor

Hamilton, OH
USA
94 Posts

Posted - 01/22/2004 :  6:42:30 PM  Reply  Reply with Quote
Regarding listing reimbursements as income with an offsetting expense:

If the independent contractor (MSer) receives reimbursement for expenses made on behalf of a client (MS co.) and adequately accounts to his client for the reimbursed expenses, he does not not have to include the reimbursement in income. Here is a benefit of having to send in those receipts or include receipt information on the report. You are providing name and location of the establishment, as well as date and amount of expense. The shop is the business purpose. The client must keep records documenting the expenses. So if it spelled out specifically as a reimbursement, you don't have to include it. In the case of a fee paid with a mandatory purchase out of the fee, you would have to include the fee as income. Taxwise, the stricter the guidelines on the purchase (you must purchase an appetizer and a dessert, you must purchase a combo meal, two shoppers must dine, etc.), the easier it is to decide just what is an ordinary and necessary expense of this business, imo. If the shop cannot be completed without that particular expense, surely it is an ordinary and necessary cost of doing business.

IRS Pub. 463 pp. 31 (This is talking specifically about travel, meals, and entertainment.)

MSPA Gold Certified #ct8cxq
Shopping Hamilton, Fairfield, West Chester and the northern Cincinnati suburbs.
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VickiC
Star Contributor

Placentia, CA
USA
455 Posts

Posted - 01/22/2004 :  9:07:04 PM  Send VickiC an AOL message  Reply  Reply with Quote
I would think the IRS would treat reimbursement only shops as barter transactions. From the IRS web site:

"Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services exchanged must be included in the income of both parties."

The service is the filling out of the report, which is done in exchange for a free meal, movie, etc.

Shopping North Orange County, Gold Certified
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.KenInSac
Inactive

Sacramento, CA
USA
104 Posts

Posted - 01/22/2004 :  9:38:14 PM  Reply  Reply with Quote
VickiC,

I agree with you. The idea that I could do a reimbursement-only shop and not have any income tax consequences just didn't sit right with me. (Which is not to say I don't wish it could be tax free!)

I think if you're earning a fee, then you can probably correctly view reimbursed expenses as ordinary & necessary; no taxes owed. But when there is NO fee, that seems a highly untenable stance, IMO.

Ken

Ken
MSPA Gold Certified Shopper
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.Nicole
Inactive

Burnsville, MN
USA
144 Posts

Posted - 01/23/2004 :  06:09:49 AM  Reply  Reply with Quote
Ok now I am with Vicki and Ken!
I think that to keep from being audited I think completly reimbursed meals should be income but what about this situation that I am sure everyone has had...

You have a shop that reimburses a meal for say 25.00. You have to purchase a certain entree and then the remainder can be used for whatever you would like. Can you expense that entree? I would not expense the whole 25.00 but say the entree was 9.99, Can you expense the 9.99 because the questions on the report pertain to how that entree was cooked and served?

Can anyone help me?

Shopping Minnesota
Gold Certified lmfgsr
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.Dawn DE
Inactive

DE
USA
518 Posts

Posted - 01/23/2004 :  07:04:17 AM  Reply  Reply with Quote
My primary disagreement with the plumber/dentist analogy is that, unlike the quote from the IRS regulation "Bartering occurs when you exchange goods or services without exchanging money", there WAS an exchange of money, the MS company sent us a check. Also, we did not receive a "service" from the MS company. I'm sure if the plumber, fixing a sink for the dentist, needed to go to Home Depot for supplies, he would be reimbursed by the dentist. He would not count that reimbursement as income. My take on the barter scenario is that it should be used as an occasional occurance, not the basis for a contractor's business. JMHO.

From my 10/18 post (taking from IRS Publication 463):
"You are considered an independant contractor if you are self-employed and you perform services for a customer or client. If you received a reimbursement or an allowance for travel, entertainment, or gift expenses (note: meals fall under entertainment for the IRS) that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you DO NOT account to your client for theses expenses, you must include any reimbursements in income"

My plan is , if I am ever audited, to confuse the auditor with conflicting IRS regulations so much that he throws up his hands in despair and gives in!!!!

Dawn
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.KenInSac
Inactive

Sacramento, CA
USA
104 Posts

Posted - 01/23/2004 :  09:09:08 AM  Reply  Reply with Quote
quote:
My plan is , if I am ever audited, to confuse the auditor with conflicting IRS regulations so much that he throws up his hands in despair and gives in!!!!


Dawn, that was hilarious! But, seriously, I have a problem with this analogy:
quote:
I'm sure if the plumber, fixing a sink for the dentist, needed to go to Home Depot for supplies, he would be reimbursed by the dentist. He would not count that reimbursement as income.

The problem I have with this is that in this case, the plumber does not derive any benefit from the supplies he purchased. He doesn't even KEEP the supplies. In our case, we keep (or eat ) them, so we do benefit from them.

How crazy is this: I do a pizza shop, for which I am reimbursed for the pizza, and get a small fee. If I eat the pizza, then I believe it is income (and I can't write-off the reimbursement as an expense). If I throw away the pizza, then I can write it off, because I didn't benefit from the purchase. I made the purchase simply to collect the fee.

I don't know that there's any tax code that supports my theory, but it "feels" right to me. Since the tax code is not necessarily logical, that probably is meaningless, but it is at least how I would defend my position in an audit.

Nicole -- I'm so mixed up, I certainly can't help you. :-( I think my own position on your scenario is the entire $25.00 meal is non-deductible. But this seems to be so undefined (at least to us lay people), that even if you try your best to get it right, you probably won't.

Ken

Ken
MSPA Gold Certified Shopper
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RebekahTN
Valued Contributor

McMinnville, TN
USA
125 Posts

Posted - 01/23/2004 :  09:41:24 AM  Reply  Reply with Quote
This question is for anyone that has already had thier taxes done:
How much time did the accountant/interviewer spend trying to figure out the "right" way to figure our taxes? And did they charge you extra for having to spend the hours reading the conflicting publications/laws? Did you have to educate them yourself?
It would be SOOOO nice if MSPA would find out how it is supposed to be recorded and put it on thier website. I suggest MSPA since they represent MSing. If they also listed with the "rules" the publication/rule/law that the decission is based on as well as the "person/agent/whoever" that they got information from. Then we could just print it off to use when doing our taxes or take it to our accountant. We would have a copy if we ever got audited to show that "this" is the way it is done in our industry. Maybe even each MS company that is associated with MSPA could also list the link or article on thier website to get the info out.
There are so many ways to interupt the law, if we are audited it would be MUCH better to refer the agent to the industry standard way of doing it that is documented. How do we justify to them how we justify the work we do, when it is a loss (on paper) from mileage and reimbursements. Could they not argue that we MUST be seeing a profit or we wouldn't be doing it. That the reimbursemnt MUST be income.... why else would one take a ZERO dollar shop or a 4-5.00 shop unless you were getting something else out of it other than just the shop fee. When I started MSing I understood that ALL reimbursements were NOT counted as income but thinking about it now... maybe some is. Or I would prefer all shops to be reimbursement only (for things I ACTUALLY NEED of course).
Do most Msers show a loss at the end of the year after adding in mileage? I haven't done my taxes yet but I believe I will on paper show a loss although in "real life" I did see a gain.

Rebekah Blake

Shopping and Merchandising in McMinnville, Manchester, Smithville, Tullahoma, Woodbury, Sparta, Cookeville and Murfreesboro Since April 2003.
MSPA Silver Certified # xxfuj7
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