@paul27 , while agreeing with @ee-ea , I understand your predicament --- the monies reported on 1099-NEC is in an escrow account ( IOLTA ), shows on your books as receivables and you have no incurred expenses to show against it.
1. while I am not accountant, because you are using accrued accounting, you could enter the expected/planned expenses as paybles in your books --- this will allow a fair taxing ( to the extent currently planned ). It will be copacetic with the contractees books.
2. The other way would be ignore the 1099-NEC -- ( not the best way ), wait for the IRS to send you a CP2000 notice of unreported income and then explain to them that this 1099-NEC amount was being held in an escrow account and really constructively received ( because the restrictions of perform or lose clause ).
No matter which way you go , the fact that the entity has reported this income ( which I think is in error ) on a 1099-NEC , IRS will assume that this is income and must be taxed.
Hope this helps
pk
