Acting as my own general contractor and have it set up as a business. Does QBI apply?

[dk603]

I have a business set up for a self-build. Acting as my own general contractor and in some cases, as the contractor itself. I have no intention making a profit off myself. Does my business qualify under QBI rules?

[ShirlynW]

No. Your business does not qualify under QBI rules. Since you have no intentions of making a profit, the IRS defines your activity as a hobby and not a business.

The IRS states, "a hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit." 

[dk603]

Ok. Then all business related expenses are not deductible then? If I plan on making a $1 profit then that would qualify as a business and QBI? In my case, QBI increases my tax burden for 2022 because it was operating as at a loss.

[KrisD15]

Are you saying that you set up a business in order to build your own personal residence? 

If yes, those expenses would be personal and not deductible as business expenses. 

(However you would be required to issue 1099-NEC to your sub-contractors since you are a business entity) 

[dk603]

The intent is to live in the home but it might be sold depending on the situation at the end of the build. Part of the reason we set it up as a business is that we wanted the protection the LLC offers.

Curious. What would you do if you were building with the sole intent to sell at the end  but then decided you were going to keep/buy it? What would need to be done from a tax perspective then assuming you were treating your expenses as this was a for profit build the whole time? You would need to pay back the tax savings?

[KrisD15]

Here is a link to a conversation on this subject. 

I think basically you would purchase the house from the business, but this could raise a few eyebrows with the IRS. 

You would need to be transparent and not buy or "keep" the house if it resulted in any deferment of tax. 

You would either need to pay a fair market value to the company to generate taxable income, or not pull any "pay" yourself when building the home. 

If the business pays you (depending on the business type) , then you keep the house, the business might not recognize the profit it deserves.

Your basis would be questionable as well. As long as you only pay "everyone else" your basis would not include your own revenue. 

If you live in the home at least two years and sell, any increase of value might be excluded from capital gains. 

I don't see anything illegal about it if you treat the expenses the same as if you were an individual paying to have your house built. 

Material and outside labor would be personal expenses. If paid from the business funds, there would need to be a clear log kept. 

I don't think you could allocate business expenses, such as a license fee, to the cost of building the personal residence, on the other hand, if you don't intend to ever build a house for profit, those costs would not be business expenses either. 

[dk603]

Thanks for some clarification. I'm not sure I've fully wrapped my head around this yet. As I mentioned earlier I set up the LLC primarily for the protection if affords me. I will be hiring out some of the trades for the build and some of the land work. The rest I am doing myself. Perhaps it is best to list what I have spent money on so far and 

1. Bought equipment to do a lot of the work myself. (Tractor, power tools, other land clearing equipment, fuel, maintenance and repair). This equipment will then 'converted' for use for our farm business
2. Insurance and interest on the tractor
3. I've rented some heavy machinery to do some of the land clearing
4. Purchased materials for a temporary driveway
5. Had a 3rd party put in a culvert
6. Purchased surveys and septic design
7. Purchased some landscaping (grass seed, bushes, trees, loam)

Other expenses yet to be realized (not exhaustive):

1. Materials for the build
2. The trades (builder, electrician, plumber etc)
3. Other services like paying someone to haul off tree stumps and other debris
4. Anything else I am missing

Given the expense I've already incurred can any of that be claimed as a business expense on my taxes?

[Vanessa A]

If you are not holding yourself out to others for the business, you would likely not pass an audit if you took deductions and expensed part of your build since this is likely to be a personal residence.  The fact that you set up an LLC would not change anything.  Your intention is to live in it as your own home.  I would be highly concerned with this being looked at as tax fraud, since you are knowingly trying to take deductions on a property that is mostly intended to be personal use but you may decide to sell it. 

If you were a true contractor offering a service to the general public, all of the above expenses would be deductible or depreciable in some way.  However, the fact that you are not intending to make a profit and you are not actually starting a business would make all of the items you listed non-deductible.  

You would add them to the cost basis of your home and then if you decided to sell your home, you would deduct that from the selling price to arrive at your profit. 

[dk603]

Thanks.  I appreciate the answer. I'd like to explore the intent to start a farm portion of this. The initial part of this build is clearing the land to create pasture for the future farm. Hence the reason I purchased a tractor which will be used on the farm. If we never built we would still be clearing the land for farm land. If I removed any expenses that are specific to a home build (at this point just landscaping) and just included  those expenses necessary for the establishment of a farm could I still deduct those expenses?

[Vanessa A]

The farm is a different story IF you are doing it for profit.  You would be able to claim things like your tools and tractor as a farming asset.  Depending on the cost and other factors, you would either depreciate or expense them.  But, since you are not yet farming you would not claim the expenses on your 2022 return, you would wait until your 2023 return if you have the farm operating in 2023. 

[dk603]

We would be farming for profit. Curious about the expenses though. Wouldn't they be a business startup costs ?

[Vanessa A]

Yes, they would be business start up costs, however, you cannot deduct start up costs until you actually start the business.

  Like depending on the tractor, some of those can cost a half of million dollars.  This would not be a start up expense.  This would be an asset to be depreciated the same as if you would build a barn. A smaller tractor could be expensed using Section 179.   A driveway and a culvert would be assets to be depreciated as well. Most of the expenses, other than interest and insurance, would be long term assets to be depreciated. The rental equipment would be one of the few things you could expense. 

Some of your landscaping could be a business expense if you are using it to aide in your land drainage.

The biggest thing is, once you start farming, then you can start depreciating and taking the start up costs. But you have to get the business up and running before you can take the expenses and deductions.