Whether you do your own taxes or have them prepared, you need to know about taxation and your mystery shopping business. I have done my own taxes for years and this is what I have found as regards to mystery shopping.

First, you will be filing a "Schedule C" for your shopping business with your personal return. On that form you will be claiming your income and expenses from shopping to come up to a net profit or loss that will be transferred onto your 1040 (usually on line 12 of the front page of your 1040 unless they change the form this year).

You will be asked what your "Business code" is, which is simply the type of business you are in. I indicate code 541910, though I know other shoppers sometimes use different codes.

You will need to decide whether your business is done on a "Cash" or "Accrual" basis. Whatever you elect to do in the first year, you will need to do the same EVERY YEAR thereafter for the life of your shopping business.

"Cash" is probably the most frequently used method by shoppers because you claim what income you actually RECEIVE during the calendar year and what expenses you ACTUALLY PAY during the year.

"Accrual" is different in that it is what you EARNED and what expenses you had during the calendar year that you claim, whether you have received payment by Dec. 31 or not. This is definitely my method of choice because I can go through my records a week or two before the end of the year to decide if I have earned under $400 net income or not. This allows me in the last days of the year to make business purchases (camera, laptop, memory cards, thumb drives, DVR, etc.) to reduce my net income to under $400 so I am not subject to "Self Employment Tax". If I were working on a cash basis, electronic payments or a mailbox full of checks on December 31 could totally mess up my planning. And remember, if you do a job in 2010 that does not get paid until 2011, under the cash method it is considered income for 2011. Under the accrual method, if you EARNED the money in 2010, you claim it for taxes in 2010. If you never get paid for it (company went out of business, company shorted you on the payment and will not make good on the rest of it) you can claim a bad debt deduction on it on your 2010 tax return if, by the time you do your taxes, you know you will never be paid, or you can deduct it in 2011. I find this can be useful in adjusting my income as well because it can allow me a deduction for the following year if I don't need it in the current year. The deduction to income is taken in the year you write off the bad debt.

There are two things you need to be aware of in your tax planning. First is that any income over $400 is subject to Self Employment Tax. When you work with a normal employer, the employer pays half of the money that goes to Social Security and Medicare on your behalf. The total of these taxes for every dollar you earn over $400 is 15.3%. As an Independent Contractor, you must pay both the employer and employee portion of the taxes. Thus it is to your advantage to take what legitimate business expenses you can to keep your Schedule C net income under $400.

Second is that IRS expects your business to make a net profit three of the last five years. While it is indeed our goal to always make a profit, there were years like 2008 and 2009 where that was very difficult because of the high mileage reimbursements you were entitled to take and the distance we needed to travel to find work in a sagged out economy. Failure to make a profit three out of the past five years will cause IRS to make a determination that your "business" is really a "hobby" and not entitled to business deductions such as mileage, equipment, etc. You do not want that to happen! If this is your first year shopping, don't be too concerned if you have a small loss. If you have shopped a couple of years and are going to have trouble meeting the 3 of the last 5 rule, don't claim some of your expenses or postpone the expenses into 2011 to show a profit for 2010. My business worked at a paper loss in 2008 and 2009, so in 2010 I need to make a profit or I will be in violation of the 3 out of 5 year rule. IRS is not likely to challenge you for UNDERCLAIMING expenses in order to show a small profit.

Reimbursements are not taxable but all fees and bonuses are, whether you receive a 1099 from the company or not. I generally receive only one or two 1099s per year and I just file them away. Based on my records, I enter my total income as a lump sum and should there be a question, I have the itemized information to back it up from my shop sheets. Different shoppers handle what they are reporting in different ways. Some claim only their fees and bonuses on their Schedule C as income and then deduct their mileage and expenses from that. My personal preference is to claim every cent I get from the companies and then create a line item called "Reimbursed business expenses included in income" in the expenses section of the Schedule C where I subtract out all reimbursements. I do this for two reasons: First it makes the income line of the return more feasible as being a job rather than a hobby. Second, my statement of "Reimbursed business expenses . . ." pulls out all those reimbursements and makes a following line item I create called "Unreimbursed business expenses" more feasible and logical, I believe. Whenever you do a flat fee job and are required to make a purchase, that purchase becomes an unreimbursed business expense. Similarly, if you are being reimbursed 'up to $1' and walk in the store to find that the cheapest item you can reasonably locate is $5, you must spend $4 more than you are being reimbursed to be able to get the job done. I claim the $4 as an Unreimbursed business expense. You do a job where you are required to purchase a regular burger, small fries and small soda and are reimbursed 'up to' $4 and the price for those items comes out to $4.93, you have an unreimbursed business expense of 93 cents. There are shops to be done at Costco that require a Costco membership. When my membership is up for renewal, I renew when I next go for a shop and list it as an unreimbursed business expense of that job because I have no way of knowing if that shop will ever be available to me again. Of course future shops there will not have that expense until it is time to renew my membership again. Finally, you do a job, enter your report and, for whatever reason, the report is rejected. While you can't claim the fee as a "bad debt", because according to the company you never earned it, you can leave the mileage in your records to deduct and you can move the required purchase amount spent to unreimbursed business expense because it was a good faith expense that is not going to be reimbursed. (Keep track of these things! Over the year they can mount up. I always have several hundred dollars of them, though mostly from fee only shops.)

Be careful about "double dipping." I occasionally am reimbursed mileage at 26 cents per mile. While the company will list this as a reimbursement, I feel I have a choice. I can move the reimbursement over to the fees and bonuses category as taxable income and take the IRS mileage deduction of 50 cents per mile (in 2010) for those miles or I can be sure that I don't deduct those miles at all when I do my IRS mileage calculations. But I had better not decide the reimbursement is a tax free reimbursement AND take the IRS deduction for the mileage. Similarly, I need paper for my printer. I do an office supply shop with a $2 reimbursement and buy the paper for a total of $3.32. I claim the paper as a $2 reimbursement and a $1.32 office supply expense with a note on my expense sheet that it was $3.32 with a $2 reimbursement. IRS would be unhappy to see me have the $2 reimbursement and still claim the entire $3.32 as an "office supply" expense.

So what CAN you deduct? The categories that apply most to shoppers are Car and truck expenses, Repair and maintenance, and Supplies. Generally any equipment you purchase for your business needs to be "depreciated". This includes thing s such as computers, printers and other items that cost more than a couple of hundred dollars and should last for a few years. However, there is something called a Section 179 expense deduction that allows you to take the full price of equipment as a deduction in the year of purchase rather than go through the whole depreciation record keeping. The limitations on that are pretty high and you are unlikely to exceed them, no matter how fancy your equipment is. There is an area in the expense section of Schedule C that allows you to deduct for repairs and maintenance. If you take your ailing computer to the local geek, this is where that expense fits in. Very little of a shopper's equipment (except vehicles--which are covered in vehicle expense, not in repairs and maintenance) requires outside maintenance. Supplies tends to be a catch all. Paper, pens, pencils, envelopes and stamps to mail in materials, clipboard, stapler, printer cartridges, batteries, thumb drives, minor software, memory cards, etc. fit very nicely here.

The Schedule C allows you areas to claim expenses such as advertising, commissions & fees, contract labor, depletion, interest, legal & professional services, pension & profit-sharing plans, rent or lease, taxes and licenses, and travel meals & entertainment. These really do not apply to shoppers because why and how would a mystery shopper advertise? (Bribing your scheduler does not qualify as advertising :-) ) The commissions & fees line item pertains to people you employ and is an expense item--do not put the commissions and fees that the companies pay YOU here. Mostly we are not allowed to subcontract our work so would not have any commissions & fees we paid out. Interest applies to loans. The only loan even vaguely related to your business would be a car loan (and that is covered in your vehicle deductions) or interest on a credit card for shop purchases you have not yet been reimbursed for. I see nothing in the regulations that allows credit card interest deduction, sorry. You might have legal & professional services if you needed to take a company to court to get payment or for getting your tax return prepared for you. The cost of setting up company based pension & profit-sharing plans is prohibitive to a business as small as mystery shopping. By properly claiming your legitimate business expenses you are unlikely to have more than a $400 profit anyway. You do not need to deal with travel, meals and entertainment unless you are attempting to claim going to professional meetings. When you do something such as a restaurant shop or a golf shop the expenses you incur are a reimbursed or unreimbursed business expense as they are a specific requirement of the job. They are not reflected in the travel, meals and entertainment expenses at all. That line item is designed more for salesmen taking a client to dinner or a round of golf--not in the normal purview of the mystery shopper.

While you could, in theory, claim a home office deduction, it is a risky business and probably not advisable. Part of the rules include that the space must be separated by doors from other living areas of the house and used for NOTHING except your business. If you own your own home, you would need to claim depreciation on the space, furniture etc. and if/when you subsequently sell your home you will need to "recapture" the depreciation claimed as a lowering of your cost basis in your home. This is a situation where IRS can reasonably expect you to prove you did use the space exclusively for your business, and that is not easy if there are toys on the floor, a hideaway bed, personal files in the file cabinet etc. IRS specifically prohibits claiming your first landline telephone service to your home. They figure that everyone has and needs that anyway. I would even be cautious about claiming long distance calls from my home phone without careful documentation of to whom the call was made, when and for what purpose. Generally this is not an issue as most companies have a toll free phone and fax numbers. I do claim my cell phone, as it was obtained as part of a shop and is used almost exclusively for shops. I keep my cell phone records to show that I am not working up additional charges for personal use and that personal use constitutes only a very small fraction of its overall use. Thus I use it for every phone shop I perform and every company contact. Internet expense incurred is something which I have never been willing to claim with respect to my shopping. Certainly we cannot perform our jobs without an internet connection, but IRS is too specific that the deductible kinds of expenses are purchase of domain names and setting up web based sites. If someone locates information related to deduction of a portion of monthly fees I would love to have an IRS link to the information as it applies to Schedule C businesses. I do deduct my annual membership at Books-a-Million that I purchase solely to use as a nearby location Wi-Fi backup location for when my own internet service goes down (free Wi-Fi locations are significantly more distant and/or close early).

Car and truck expenses can be calculated one of two ways. Whichever method you choose, you MUST STICK WITH THAT METHOD every year as long as you are using the same vehicle. By far the easiest method is the standard mileage deduction. You note your mileage on January 1 (or on the date you started your business if you started it in the current year) and your mileage on December 31 because you will need to account for the mileage that was used 1) for your business, 2) for commuting (if you have a regular job) and 3) for "other" (which is basically personal miles). If you have no job away from your home, you will have no commuting mileage and every mile you drive is either business or personal. You need to have a record of the business miles you travel. This can be accomplished with a good mileage log in your vehicle or in some other written form. I just note the mileage with my records of the jobs I performed. For 2011 IRS will allow you to deduct 51 cents per mile for every business mile travelled prior to July 1 and 55.5 cents per mile for every business mile between 7/1 and 12/31/2011. Usually the deduction amount changes on January 1 and July 1 each year, so it is important to note your miles accordingly.

If shopping is a second job for you, your trip to and from your employer's location is considered commuting miles and is not deductible. You need to read the IRS rules carefully at www.IRS.gov to see what scenario fits you. But in general, if you stop and do a shop on your way to or from work on a reasonable commute path you probably will not be able to deduct the mileage.

The other method for vehicle deduction also requires January 1 and December 31 mileage and the number of miles you travelled for business because you are figuring a percentage of the vehicle's expenses that are applicable to the business. For the expense method you depreciate the vehicle over time, you can claim repairs and maintenance, gas, tags, insurance, etc. Word of caution, however, if you get your gas from gas shops and your oil changes or maintenance reimbursed as shops, you want to make sure you exclude those reimbursed items so you are not double dipping. Since much of my routine maintenance and a fair amount of gas is reimbursed by shops and my vehicle is worth very little except as a trade in, I do a whole lot better claiming mileage. Even if I purchased a new vehicle I would stay with the per mile deduction because I generally keep a car until it is worthless. If you trade in cars in just a few years or lease, you probably should explore the expense method.

Of course the reason that I shop, if you pay your own health insurance, it can be deducted against your business to the extent that your business is profitable. Thus, if my health insurance costs me $3100 per year, the first $3100 of profit gets wiped out to cover my health insurance. My business, then, can earn up to $3501 profit before I end up with a net profit of over $400 that would start Self Employment Tax liability. But my insurance is only deductible to the extent that my business shows a profit. Any uncovered balances get moved on over as a personal expense on my itemized deductions, where they offer me significantly less tax benefit.

Whether you do your tax return yourself or have it done professionally, keep good records. You need them, your tax preparer needs them and IRS has every right to ask for them. Are you likely to get audited? No, but if by some chance you are, history says if they find something wrong with your return you will be closely scrutinized in the future. TurboTax usually releases its annual tax software around Thanksgiving weekend to the office supply stores. Although you generally have no special offers on it until after the beginning of the year, making a quick pass at your tax return in November or December allows you to make adjustments to your Schedule C bottom line before the end of the year and can save you some real money by adjusting your end of year expenditures. I usually purchase the cheapest version that includes Schedule C information and deduct it in my supplies section of my return. For me, it is worth every dime. But you do NOT need to purchase software. If your Adjusted Gross Income is under $56,000 per year you are eligible to prepare and electronically file your own return on line (see [www.irs.gov]) and some of the providers they list may include Schedule C information. And a word of caution: About the beginning of the year you will see some tax shops that pay usually about $75 that require that you take out the Refund Anticipation Loan (RAL). These jobs will require that you are expecting at least a certain amount of refund, they require that the preparer electronically files your return, and the expenses of tax preparation and the fees and interest associated with signing up for the RAL are generally reimbursed expenses. The loans from these shops WILL be reflected on your credit report. Make sure you know exactly what you are getting into when you sign up for these shops. Since these tax preparers know they are shopped, you may not be terribly happy with having it revealed that your Schedule C is for mystery shopping, and in general it is advisable to keep any shops from having possible adverse effects on your credit score, whether they are insurance inquiry, tax, auto dealership negotiations, cell phone or other shops that access your credit report. Your credit score is worth more to you than the shops because it affects your interest rates on credit cards, any type of loan and mortgages.

For the 2010 tax returns, the early tax shops that appeared required that you have reasonable expectation of at least a $300 refund and be eligible for an RT, which is a Refund Transfer. This generally requires no credit check and the shops were paying only $70. Realize that with any tax shop, if you do not qualify for the refund product (RAL or RT) you will not be reimbursed for having your tax return prepared, nor will you receive the fee.

Finally, I cannot emphasize enough the importance of keeping good, clear records as you go along. I remember receiving a frantic PM from a shopper who had been shopping since May or June (they weren’t sure). They tossed receipts after they were paid. They thought they had worked with 5 companies—1 direct deposit, 2 Paypal and 2 by check—but it might have been more. They didn’t know if they were paid for everything they did and they never recorded mileage. Don’t do this to yourself! The only thing I could suggest is that from the websites that listed their old jobs they could reconstruct work dates, from Paypal and their bank account they could tie these payments back to jobs as long as they knew how much was payment and how much was reimbursement. Based on Google maps they could reconstruct mileage at least to some extent, but they needed to date organize their work to figure out what shops were done on the same trip. This could not possibly have been a fun process for them.

Start the New Year right! Record each job on some form of permanent record. Revisit that record and record the date you actually did the job, what the fee and reimbursement and any unreimbursed expenses may be, plus the mileage. Revisit the record again when the payment comes in so that you will know when and for how much you were paid. If your records are electronic, make certain they are backed up frequently. If they are hard copy, make sure they are filed safely away so they don’t get pitched in a cleaning frenzy. Realize that if you want the tax preferential treatment as a business you need to function as a business, and that includes good record keeping and retention.

1099s will be issued by any US based company for whom you do $600 in fees per year. Unless you have an unusual amount of work in your area or very high fees (excuse me while I laugh), you are unlikely to see any 1099s. And if and when you do see them, they are unlikely to match your records whether you are a cash OR an accrual shopper because the company claims the expense when they pay it and if you are cash you claim it when you receive it and if you are accrual basis, you claim it when you earn it. 1099s are not really an issue but rather claiming what you earn whether you receive a 1099 or not

Taxes are a 'pay as you go' system, which is why there is withholding on a standard employment paycheck. With something like mystery shopping as your sole source of income, you probably don't need to worry about doing quarterly estimated payments because chances are you won't earn enough to owe significant taxes after you have taken your mileage deduction and other appropriate deductions. For 2009, from the irs.gov website:

"General Rule
You must pay estimated tax for 2009 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of;
* 90% of the tax to be shown on your 2009 tax return, or
* 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months."

The chances of owing $1000 in taxes based on mystery shopping is slim to none. You may, however, have other sources of taxable income such as interest, dividends, other employment and such that mystery shopping income added to them would put you over the top.

I have found IRS to be fairly forgiving on the penalty for underpayment if the underpayment is not outrageous, does not happen often and you make some effort to explain why you underpaid by too much. If you underpay your first year shopping such that you owe a bunch of taxes, you will probably want to do estimated payments the following year. The quick and dirty way to figure how much to pay as estimated is the previous year's total tax liability less what is withheld by employers, then divide that by four for the 4 quarterly payments. But if you have had a substantial drop in income (such as job loss), this approach will overpay your taxes and allow Uncle Sam to use your money interest free for the year.

With taxes you generally have to file expenses and income in the year they were earned. The absence of a 1099 is NOT a reason not to file a Schedule C. You had income from the work, whether you had $600 from any one company or not. Do you think that a plumber who only clears home drains doesn't have to file? When was the last time you wrote out a 1099 to your plumber for the drain cleaning he did on Thanksgiving?

You have records of your business. You have payment receipt through PayPal, through direct deposits, through deposits to your bank account, through the check stubs. You have your shop logs to show the jobs performed. You should have some written proof of your mileage. Unless you rent, I would not touch claiming a home office because of the depreciation involved now and its recapture later. And the rules for a home office are strict in that it must be a separate space with its own door and cannot be used for other things (or at least that was the deal last time I read through the IRS stuff).

If the net income from your Schedule C business (i.e. income minus expenses) is $400 or more I believe you are REQUIRED to file a tax return, even if you had no other income, because you are subject to self employment tax.

With 80 jobs, it is very likely that you did not earn as much as $400 net income. Do a quick check

fees + bonuses = ________(A)______________

Expenses:
miles driven X $.55 = ____(________
office supplies for shopping for which you have receipts = ___(C)________

If (A) - ( - (C) = more than $400 you need to be having the discussion with your tax preparer. There are other things that can be deducted. For example, if you did "Fee Only" shops where there was a purchase required but no reimbursement, the required purchase is a business expense. If you purchased equipment for your business (computer, camera, etc.) it is deductible.

My guess is that your tax preparer is trying to save you money because overall from your situation you may not be required to file a return at all. In that case (or in any case) 2010 is a fresh slate for income and expenses.

If you use the actual vehicle expense you will be depreciating the vehicle over time. But you are using the value of the vehicle when you first put it into service. For my own business, I began shopping when my vehicle was already 5 years old, so frankly its book value was already pretty slim. I am still using the same vehicle 6 years later. . . I suspect that very few folks begin shopping with a brand new vehicle. Because I have systematically done oil changes and required maintenance when it was due, my vehicle, after 11 almost 12 years of use, has still had no major repairs--it has maintenance but few repairs. I get a fair amount of gas from gas shops--because I am being reimbursed that, I can't really claim it as a vehicle expense I paid. I get virtually all of my oil changes reimbursed--again, can't really claim it as a vehicle expense I paid. New wiper blades have been paid for by shops, vehicle washes have been either driveway or shops, my occasional bottle of fuel injector cleaner or Slick is either paid for or heavily subsidized by shops. That gets expenses to looking at tag and insurance. Because my vehicle is so old and had a good repair record to start with, my insurance is a lot lower than my friend's new car. In 2009 I drove my vehicle 8026 miles for shops for a mileage deduction of about $4,415. For me, at least, there is no way that I could come up with that kind of costs I actually paid and depreciation for the year.

But regardless of your method for claiming vehicle expenses, tolls and paid parking are deductible as a separate item.

My understanding is that if you tend to turn over vehicles fairly quickly, the actual expense may work better for you. Similarly if your vehicle systematically has heavy repair expenses year after year, actual expense may work better. Just realize that whatever method you chose for your vehicle is the method you must continue to use with that same vehicle throughout its use in your business.

My habits are to purchase new, maintain it well, keep it for 10-15 years until repairs begin being needed and trade it in. I will never be a good candidate for actual expenses.

Claiming internet service is potentially dangerous. IRS has deemed that your first land line phone service into your home is not deductible on the basic assumption that everyone needs a land line for personal use and therefore it is not an additional expense for your business. If you install a second line for your business, that second line is deductible. My gut feeling is that they would have the same approach to your first internet service into the home. I don't know about you, but we have only one internet service and we would have it whether I was mystery shopping or not.

My understanding is that utilities can be claimed as the same percentage as the percentage of your home dedicated to a home office IF you claim a home office. Again, dangerous. The ground rules for a home office are a completely enclosed space with closing door that is used exclusively for your business. I.e. not a guest room with a daybed or Murphy In-A-Door; not a playroom for the kids; not a place where the kids come in to use the computer and print their homework; not out of season clothes storage; no personal or other files in the file cabinet--just shop stuff. The onus is on you to prove the use is exclusively for your business. And while this may work in a rental, in an owned property you also must depreciate that portion of your home and that reduces your cost basis in the property when you eventually sell it. And another word of caution, your business will be only marginally profitable with the easy deductions you can take. At the end of the day you want your business to make some profit at least 3 years out of 5 or IRS will deem it a 'hobby' and NO DEDUCTIONS WILL BE ALLOWED.

I'm not sure what you mean by ". . . money you might spend for meals, even if the shop isn't food related . . ." If you are talking about doing a route of 5 shops and you pull through Wendy's to grab some lunch that is not a shop, no. If you are travelling a greater distance from home, perhaps needing to stay in a hotel overnight as part of an extended route, then you need to read through Publication 463 about travel expenses to see what, and to what extent, costs may be deductible.

Office supplies are deductible. But I really have little office supplies that aren't paid for by shops, so to claim them would be 'double dipping'. But I do include in the office supply category small items such as computer cables, thumb drives, SD cards for my camera, batteries, etc.

While most shoppers don't buy a lot of supplies, we do purchase equipment and sometimes during the course of a year spend more than $600 with a particular equipment supplier. Starting January 1, 2012 there will be a new requirement that WE, as small businesses, will need to 1099 any company that we purchase more than $600 in goods/materials and services from. What this will mean for us is needing to keep track of those purchases which we plan to deduct against our Schedule C businesses. So in theory you may need the Tax ID number of your cell phone provider, if you claim it as a business expense, in order to 1099 them at the end of the year. If you purchase a new computer for $600 or more or buy more than $600 of 'stuff' from Office Depot or any other particular store for your business, you will need their Tax ID number to 1099 them.

I am reading nothing at this time that would indicate that reimbursed amounts from shops would need 1099s, which is good.

But as you revise and expand your record keeping during the remainder of 2010 and into 2011, you will probably want to make allowance for this type of information need in the future. I suspect that many stores, such as Office Depot, will start printing their Tax ID on their receipts as the 1/1/2012 deadline approaches or perhaps have paper slips near the register showing their Tax ID for 1099s.

Hopefully there will be computer generated 1099s available that will automatically send a copy to the vendor, to IRS and to you for your records so that you just go to the site, enter the information, including an email address for your copy (or your tax ID) so this does not entail purchasing forms and putting stamps on envelopes to send them out.

You are likely to be able also to use the Free File Software on the IRS website. Take a look at your options on [www.irs.gov]

SQM has live links to Canadian tax information on their site. Click on the "Steps" link and then look on the left for a link to tax information.



Edited 1 time(s). Last edit at 06/02/2010 07:31PM by walesmaven.

When it comes to your record keeping, the IRS must give "great defference to contemporanious records." In other words, update your mileage records and expense records daily (and toss the receipts into a folder or box.) That simple action moves the burden of proof for your expense accounts off of you and onto the IRS (meaning they would have to prove you were lying and you would NOT have to prove that you are not lying.)

BTW.... Credit card records have been held to be the sort of proof of expenses needed. So, set up your credit card accounts to download everything into Quicken, then label the expenses and you have solid gold records, even without paper receipts. Also, if you have depreciated your automobile (as I did in a prior business), you must take actual costs instead of "per mile" allowances. So, records of payments for fuel, tires, oil changes, repairs, tires and insurance will be necessary. Again, your credit card records will fit the need. Just prorate the costs according to the percentage of the year's total miles that were for business.

When you get Paypal payments, be sure to note in your bank records how much was fees and how much reimbursement, since the MSC does not provide that detail. I left that chore until the end of the tax season last time, and it was a nightmare of cross-referencing to get it sorted.

Of course, as Flash has pointed out, you still have to meet the "actual business" test.

We're getting close to the end of the year, so time to do your tax planning. Whether you are an accrual or a cash US taxpayer (see above) you will be responsible for Self Employment tax if your net paper profit for your business is more than $400 for the year. Sometime in the near future it would be advisable to add up your fees and reimbursements EARNED this year and add up your deductions to see if you are going to have a net profit of over $400. If you are, you may want to go shopping for your business before 12/31. Just remember that you want your business to have SOME net profit every year--just not a whole lot :-) So this may just be the time to update your camera or printer or computer or DVR or get that laptop you have been wanting.

The math is pretty simple:

Fees + reimbursements
- business mileage driven X .50 per mile (unless you are going with actual cost)
- business tolls and parking
- unreimbursed expenses (such as required purchases on fee only shops)
- supplies (paper, ink, notebooks, pens, tape and smaller items such as thumb drives, flash cards for your camera, batteries, file folders etc.)
- equipment (printers, cameras, more expensive DVRs, computer etc.)

Realize that if your business is paying your health insurance, it can be deducted from the net profits of your business. Otherwise it becomes an itemized deduction.

A landline phone is generally not deductible, though you can explore deducting the cost of your cell phone and cell phone service.

Internet service is iffy and you may be called upon to provide proof that it was used 100% for business purposes.

Home office deductions are quicksand, so make absolutely certain any space you plan to deduct is a closed space away from the rest of the dwelling that has nothing in it (nor is used for anything) except business stuff. Even then, if you own your own home you will be required to take mandatory depreciation of the space which is likely to put your business in the red and be required to be 'recaptured' when you sell your home. Neither is likely to do you any favors.

I understand TurboTax is out and I plan to pick up mine tomorrow with a $10 discount coupon at Staples :-)

Final note. IRS has not released yet what the business mileage deduction will be for next year (2011) so stay tuned. My bet is that it will stay at 50 cents per mile, but with gas prices up it may well be a little higher.

Just a reminder that when you first use a car in business, you have to choose between depreciating the price of the car and taking the per mile deduction. If you depreciate the car (usually over 5 year, the last time I looked) you must then take acutal costs for fuel, insurance, repairs, tires, oil changes, etc. Of course, for a car used both for your busness and pleasure, you prorate those actual costs for the business portion of your miles. So, using the depreciation/actual cost method, you start by allocating miles to business, commuting (for your day job, if any) and personal. For instance, if 55 percent of your mileage is for your MS work, then you get 55% of total fuel and other costs as a deduction.

BTW, once you have finished depreciating the car (i.e., after the 5 year depreciation period) you must stay with the actual cost method of figuring your deduction. You cannot just switch over to the per mile governemnt deduction. So, think about how long you keep your cars, as well as what you think that you will be grossing from MS work five years later, before you make the initial election.

Here's a bonus tip. If you are doing a shopper trip but also need to go to your banks, grocery store and cleaners for personal reasons, the IRS has a handy little rule that can keep the whole trip a business event. I call it "the enroute rule," but I suspect the IRS has another name for it. If you do not deviate from the "business trip route" by more than about a mile (I look to Flash to know or find the exact distance in the regulations) you don't have to count any of the mileage as personal use. For those of us who do a lot of shops, this can be a serious tax savings. By using this loophole, about 93% of my mileage is for business each year. I note in my car log as follows: shop destinations, beginning mileage, ending mileage, "grocs enroute". That way, if I am audited and they look at my Visa account and say, "But you also bought groceries on the same day. How is it that you have no personal mileage that day?" I have an entirely accectable record showing that the grocery stop met the "enroute" rule.

And a couple of cautions on using the 'actual cost method' on vehicles. If you decide to go that route remember that gas that is reimbursed as part of shops or oil changes that are reimbursed need to be pulled out of your 'actual costs' as ultimately you did not pay for them and claiming them would be 'double dipping'. And absolutely correct that the method you choose the first year is the one you must use as long as you own the vehicle.

I've never seen or heard about an 'enroute rule', but that doesn't prove anything. I have always just taken a 'fairness' approach to mileage. If I go out of my way a couple of miles on a purely personal errand, I just deduct a couple of miles from my overall mileage claimed for the route. But mileage is not totally scientific anyway. I often do not take the shortest route according to Google Maps because it is not the quickest due to traffic lights, stop signs, school zones, traffic, speed limits, etc. I always try to schedule routes so that I have a time cushion if I am doing shops prior to one that has a fixed appointment time. If I am way early, I may take the time to stop in a store to use their restroom and freshen up or change clothes if I am over dressed or under dressed. And in fact I may schedule extra time in my route if appropriate dress between two shops is seriously different and I need to stop and change. Often it is a grocery store where I stop and often they are not in the most direct route to my destination. If I still have time I may even browse the store to kill time before my appointment. I don't deduct at all for these, even if I make purchases.

Because of the layout of my community and the many branch locations of banks, locations of grocery stores and other chains, I can almost always handle my personal business en route, whether I am headed north, south, east or west. Yesterday and today, without shops, are probably the biggest non-shop mileage I have put on my vehicle all year.

Actually it makes perfect sense. If you know your fees and the amount paid, you are in good shape. You can spend some 'quality time' reconstructing mileage from Google Maps.

If you have no other employment, then the distance from your home to the shop(s) and back home would be the number of miles to claim. If you did several shops on the same trip, then figure your mileage from point A to point B to point C etc until you returned home. I usually just put all the mileage with the first shop and reference the other shops done on that route to the shop where the mileage was claimed. Write it out now so that you have a written record before you actually do your tax return. With the mileage deduction being 50 cents per mile, if you drove only 100 miles to do shops this year that is at least $50 you don't need to pay taxes on as the mileage is deducted on your Schedule C for your business and you are taxed on the net profit of your business.

If you had another job, you need to be aware that IRS does not allow you to deduct mileage for commuting to work. IRS I don't find terribly clear about how to calculate, so here is a "Fairness" approach I would take. Lets say that I went from home to point A to do a shop on my way to work at point B. After work I went from point B to a shop at point C and then went home. My total mileage, lets say, is 34 miles. My normal commute to work is 21 miles. Therefore in order to do the jobs I drove an additional 13 miles. 13 miles is what I would claim as shop mileage. If I left from home to go and do shops that did not include going to the office before I returned home, then I would claim door-to-door mileage.

If you are going to present your mystery shopping as a business you MUST file a Schedule C with your tax return to claim the income and whatever offsetting expenses you have. If you are going to present your mystery shopping as a hobby, then you will just claim your shop income on line 21 of your 1040 and be eligible for no deductions such as mileage, supplies, etc. (assuming you are not receiving any 1099s from companies because you earned more than $600 in fees from them).

It does not matter whether you are a cash taxpayer or an accrual taxpayer, mileage will be claimed in the year it occurred.

IRS does not allow deduction for commuting mileage. If you are doing only mystery shopping (no regular office away from home) then you have no commuting mileage and your mileage from home, through your route and your return home, is 'shop mileage'. If you have a regular workplace away from home, mileage to and from that workplace is considered 'commute mileage' and is not deductible. If you do shops on the way to and from that regular workplace, that mileage would be considered 'commute mileage' to the extent that it did not deviate substantially from a normal and usual path between home and your workplace.

I am not an IRS agent, but lets be reasonable. If my normal commute to work is 12 miles, that is a 24 mile round trip. Lets say I do a breakfast sandwich shop on my way to work. At lunch I go do two banks and a sandwich shop. On my way home I drive over to the mall and do 3 retail store shops before returning home. My total mileage for the day was 39 miles. I personally would be comfortable claiming 15 of those miles as shop miles.