Although deducting expenses on Schedule C that shouldn't have been included on the 1099 form in the first place results in the same net income and the same federal tax on that income, a problem arises when doing business in more than one state. Many states determine the percentage of state income tax owed to the non-resident state by taking the percentage of business GROSS REVENUE (not income) earned in that state. If the 1099 for the work done in the non-resident state includes expenses, that would increase the percentage of revenue earned in that state, and the tax liability due to that state would increase.
Right?
