Real Estate Development – When to Expense vs. Capitalize Costs

    One question real estate developers are faced with is when to capitalize and when to expense costs incurred before, during and after production.  As a result of the Tax Cuts and Jobs Act (“TCJA”), the way developers recognize costs may be changed and become easier for small business taxpayers.

    As part of the TCJA, the threshold in determining whether small business taxpayers meet the exception for following capitalization guidelines under Section 263A was increased to $25 million.  This provides an opportunity for those small business taxpayers to potentially deduct certain indirect expenses related to the production of real property in the year the deductions are incurred.  In determining whether you are considered a small business taxpayer, you must meet the gross receipts test under Section 448(c) and not be considered a tax shelter.  The gross receipts test under Section 448(c) is met if the taxpayers average annual gross receipts for the past three taxable years does not exceed $25 million (this amount is adjusted for inflation).  However, when performing this calculation under Section 448(c), the taxpayer must consider the aggregation rules and include other entities that meet those rules in determining the gross receipts figure.

    If your entity is under the $25 million gross receipts threshold, only costs directly associated with the production of real property are required to be capitalized. For those entities exceeding the gross receipts threshold of $25 million, the recording of costs are not as straight forward.

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    If you have any questions or concerns on whether your entity meets the exception, filing for the change in accounting method or how your costs should be recognized, please reach Brian T. Lovett, CPA, JD, Tax Services Team Leader of Withum’s Real Estate Services Group.

    Established in 1974, Withum is a national top-ranking public accounting firm providing advisory, tax and audit services to individuals, families and businesses in the NYC real estate industry. Headquartered in Princeton, NJ, additional offices are located in major financial centers including New York City, NY; Boston, MA; Philadelphia, PA; Washington, DC.; and Orlando, FL. Withum is an independent member of HLB, the global advisory and accounting network. Visit www.withum.com for more information.

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