Dear Mr. Messi,
Greetings! As the world celebrates your legendary soccer performance, we are equally excited to partner with you in the equally challenging world of real estate development. Your recent question regarding using non-direct costs from your project to offset your W2 income mirrors the keen strategic vision that sets you apart in professional soccer.
Understanding the fiscal playbook is as crucial as knowing your game plan on the field. The introduction of the Tax Cuts and Jobs Act (“TCJA”) has significantly changed the dynamics of tax planning, particularly concerning the categorization of costs.
Key points to consider in this new fiscal landscape:
- Small Business Taxpayer Criteria: The entities spearheading the project must meet the small business taxpayer criteria defined by Section 448(c).
- Gross Receipts Threshold: To be considered a small business taxpayer, their average annual gross receipts over the last three tax years should not exceed $25 million (adjusted for inflation).
- Impact of Aggregation Rules: Certain aggregation rules may impact the average annual gross receipts calculation.
- Capitalization of Direct Costs: If the entities meet the small business taxpayer conditions, only direct costs related to real property production need to be capitalized.
- Treatment of Indirect Costs: Indirect costs, such as interest, real estate taxes, city permit fees, and consultant design costs, can be expensed as they occur rather than capitalized.
- Reducing K-1 Income: This approach can help reduce the K-1 income flowing to the tax return.
- Tax Implications for LLC: As the project operates as an LLC, its tax implications align with the rules for pass-through entities.
- Qualified Business Income Deduction: Under the TCJA, qualified business income from a pass-through entity can enjoy a maximum effective tax rate of 29.6% due to a 20% deduction from the top individual marginal rate of 37%.
Given these factors, if you meet the qualifications, you may be able to deduct the indirect costs from the real estate development projects from your W2 income.
Although this information provides a general overview, I strongly recommend a one-on-one consultation with us to devise a strategy tailored to your unique situation. Just as in soccer, a well-crafted strategy can be a game-changer.
Schedule your tax assessment today by clicking here, replying to this email, or calling us at (850) 829-3733.