As with most other tax topics, the answer to just about any tax question regarding a sole proprietorship or one-man LLC reporting income and expenses on federal Schedule C is “it depends”!
A multitude of Tax Court cases show that the same tax issue is treated differently in different cases - based on the individual “facts and circumstances” of the case.
We also learned that it is vitally important to keep good books and records to document income, deductions and positions taken on a Schedule C. Even the best tax professional will not be able to properly help a Schedule C client if the client himself/herself does not keep good records.
I give my Schedule C clients the same advice I give my Schedule A clients - keep records and receipts during the year as if your return will be audited. While chances are this will not happen (although a Schedule C is much more likely to be audited than a Schedule A), if your return is chosen for review it will be a blessing to have everything well documented in advance rather than having to start from scratch and reconstruct the necessary supportive documentation.
It is impossible to properly evaluate potential business transactions during the year without a basic knowledge of the tax implications of the actions. When starting a business a sole proprietor should resolve to become more informed on federal and state tax laws. He/she should learn what items can, and cannot, be deducted on his/her Schedule C, including the special items that are unique to his/her specific business or profession, and what types of special recordkeeping is required for specific items (i.e. meals and entertainment, business travel, "listed property", etc) - and keep up-to-date on federal and state tax law changes.
Your tax professional will able to provide advice and assistance, but he will be less effective if you are “clueless”. The more you know, and the better your books and records are kept, the better you will be able to work together to make sure that you pay the absolute least amount of federal and state income tax possible – and the better prepared you will be if questioned by any of your “Uncles”.
By the way, a tip of the hat to veteran NSTP instructor Paul LaMonaca, CPA (an exception to my rule) for a job well done!