In the USA, say Jane is a 1099-type worker - she's self-employed.
She has various expenses which are generally deductions from her profit, but note that...
Looking at that document, the IRS in the US seems to distinguish between "purchases" and "expenses".
("Travel" is a third category, also handled differently.)
Say Jane is the typical type of freelancer, designing sets or writing articles. She has "expenses" (electricity, etc etc), but probably no "purchases".
So normally for a client she will make some drawings, and get $20,000 for that. That's that. At the end of the year she's grossed 100k and has a few expenses (electricity, etc).
However, let's say that during the year she happens to "make something" for a client,
So, she says "I'll build that Bedroom Stage for you." She
- buys some beds, lights, and other props, $10,000
- builds the thing, hands it over to the client, and gets $40,000
It seems she fair-and-square had "purchases" as the IRS defines it, of $10,000.
In fact, can 1099 workers actually do this sort of thing?
Or do you have to be some other type of corporation, or?
There seems to be a couple problems,
The economics are different. A typical freelancer might make 100k in a year; expenses (electricity, travel etc) are a few thousand. Whereas, if you are "making stuff", it would be completely normal to have (say) 600,000 coming in and 500,000 going out, ie purchases can be a huge fraction of the gross.
It would seem to be open to abuse, perhaps the IRS really clamps down on this sort of thing? Having "purchase" type items, would seem to be a red flag? ("I bought a big TV and a Rolex - it was used in a client 'product', honest!")
Again my questions are,
Indeed can 1099-mode workers even actually claim the "purchase" type?
If so, is it sort of a red-flag and flakey area??
Indeed, do you have to perhaps define your business as some sort of special entity (a "producer", "manufacturer" or something?) Are there other issues anyway - sales tax??