Advice on planning/building my home theater in the basement

Realizing that it was time to update my home's very old and decaying wiring, I began the process of ripping out the pressboard ceilings and wall structure that previous owners had built into my basement. I am going to be running new 12/2 everywhere and upgrading 15 amp circuits to 20 amp. in the process, I will be turning my larger basement room into a home theater and bar. I have already purchased drywall but am looking for advice on lighting as well as some solutions to problems that other people may have seen and dealt with.

1. My basement has 3 windows stretched across to of the walls as noted in the picture below. Is there any reason why I shouldn't partially cover them with a soffit and build blockouts to permanently cover them until I need access to them for some reason?

2. Ideas on what size lights to use for soffits. I'm looking at 3" Non-IC. I will have R11 insulation in the floor joists above them so insulation should be more than 3" away from them at all times.

3. Has anyone built soffits that leave a gap for led light strips, not using crown molding to hide them? I want a wide glow against the ceiling and no the neon sign look that I see a lot. I'm thinking the led strips should sit a foot or so away from the ceiling at the bottom of the soffits. If someone has a simpler idea for building the soffits that would still give me a nice glow, I'd appreciate it!

Layout for planning purposes


Soffit and lighting


Current state, after my day of destruction... cleaning to come shortly.

Well I'm thinking if I build the tray with a lip on the edge so the LED strip is just below the edge then they'd never actually see the LEDs unless on a ladder. I guess I'd need to know how far away the led strip would need to be from the ceiling to give me the glow that I'd like. Most of the tray ceiling designs that I see are simply a box and then use crown moulding to hide the strip. I'd rather build tray so that that inner side is lower, allowing a gap and the put the crown moulding along the edge of that gap.