Sole Proprietors

One in seven 2009 tax returns contained a schedule C which is where you report the income and expenses of a sole proprietor business. You have to be engaged in the business with the intent to make a profit which is determined by facts and circumstances. If you fail the facts and circumstances test, then your business is a hobby and you can't deduct any losses. What kind of deductions can you take? The IRS says you can deduct "all the ordinary and necessary expenses paid in carrying on any trade or business." The IRS further defines ordinary and necessary as appropriate or helpful. What kind of deductions can you not take? The following is just a partial list: charitable contributions unless they qualify as advertising, gifts over $25 unless you can make the case it is marketing, penalties and fines, political contributions, personal living expenses, club dues, and lobbying expenses. Returns with a schedule C have a higher audit profile with the IRS.