Tax Implication of a Management Fee

[Christopher R.]

Hi All,

My CPA is questioning whether a Management Fee that I am claiming deduction on is appropriate if I am not acquiring these services from someone else.  IE, I'm setting aside 10% of total rent as a management fee for myself come tax time. I'm sure someone has experience with this, but I couldn't find anything out there specifically talking about it.

Thanks!

Chris - Owner-Occupy Duplex Living 

[Linda Weygant]

You must actually incur an expense in order for it to be deductible.

If you want to pay yourself a management fee, you can do so, but you then need to declare that management fee as self employment income (or into another entity if you like), thus subjecting it to self employment tax.

As an individual, you are a cash basis taxpayer (unless you make some pretty specific elections otherwise).  That means that you only deduct what you pay or charge.  For example, if a plumber comes and does some work for you on December 23 and hands you a bill, but you don't pay for it until January 10, you do not get to deduct that until January because that's when you paid the bill.  If, on the other hand, the plumber does work for you on December 23 and you pay him with a credit card, you can deduct that in December, even if you don't pay the credit card until January or later.

If I could deduct for reserves... well, that'd be awesome.  I reserve for a new roof every month.  I sure wish I could deduct that now....