Expert: Arthur Naman - 2/9/2011

Question
I am a 1099 contractor working with a firm, and I receive a monthly draw that is recoverable by the firm per the terms of my contractor agreement.  As I increase my sales, the total revenue generated would be used to pay down the draw balance over time.

The draw is made payable to my one-person LLC, and I am not issued a 1099 by the firm.  My question is whether or not the draw woudl be considered income or debt.  If it is income, will this need to reported on my taxes?  If it is a debt, can I still deduct business-related expenses on schedule C?.  Further, not sure how this is impacted by the fact that no 1099 is issued.

Thanks for your help.

Answer
I believe that you have income after your receipts from the company you are working for are no longer recoverable, in other words, you do not owe anything to the company.

At the time you receive the draw, I believe you have receive unearned income, a liability. At such time as your sales increase to the point where your draw is no longer recoverable, then you have income to recognize.

Your not having received a form 1099 is okay, especially since you do not want to recognize income until the draw received is no longer recoverable.

Please ask a follow-up if you still have questions.