Bed and Breakfast

[cathe]

I am getting no where fast trying to find someone to discuss a new Bed and Breakfast. I have a client who opened one up as of the first of this year, but didn't talk to me first. I know....big surprise. She is trying to get me to say I will depreciate her whole home and all things involved, because she heard from someone that she should build a cabin behind the home and live in it.
Here is what is keeping me up at night. She is only offering the rooms two nights a week. This is a three story, 4 bedroom victorian home. I can't imagine an IRS agent buying that she and her husband will not use that home anytime during the other 5 days of the week. There will not be a separate address, this place is in the country. I thought I was all set with square footage and number of nights, etc. Now this cabin. Is this now a hotel? Is there any difference between a hotel and a bed and breakfast for tax purposes? Too many questions and no where to ask.
I have tried calling the IRS, they can't talk to me about it because they can't get into "discussions". The practitioner priority service doesn't seem correct because I am not talking about a tax return that has even been done yet. The IRS wants us to do returns that are audit proof, but I can't talk to an auditor. Maybe I am nit-picking here, but I can't believe that this wouldn't fall apart under an audit because there is no way these people can prove they aren't going to use the house when no one else is in it.

[Gretel]

Cathe, I would want to know why they are renting out the rooms 2 nights only. If they are away themselves the other nights, that would be Ok. I certainly share your doubts. I would want to see a budget showing that their intent is to make a profit. Maybe it isn't?

[cathe]

She says she would like this to work and allow her to retire. I have been with her through one other business that I reclassified as hobby. Her intentions are reputable, but she is not a good business woman. I can't keep her from trying based on past performance in an unrelated business, but I have the feeling I will be having a hobby/business discussion with her again in a few years. They do not normally spend any nights away from home.

[DaveO]

I do enough audits that I know several auditors I can phone and have the "what if" conversation with. I would definitely not want to try and justify a whole house depreciation based on a 2 night a week B&B with any of them.

Does she also realize that they would be running the clock down on a tax free sale of the home by using it 100%? I could see allowing the guest rooms for depreciation but not the whole house.

[taxmom34]

where are you , cathe

are you in arizona, your client sounds like my ex daughter-in-law. lol

[taxmandan]

2 nights out of 7 isn't even 50% use for depreciation purposes, doesn't matter what the use is the other 5 nights, if they are not held out for rent, then depreciation is limited. Sounds too much like a hobby to me and the cabin thingy is just a dodge to justify 100% deduction, wouldn't fly with me doing the tax return, unless disclosure is made with the "audit me" form.

[Gretel]

I think as far as depreciation is concerned it is 100% or nothing. Not the same as day care biz. Actually this is true for the whole thing. Either a room is used for biz only or it will flunk the test, same like any other OIH.

[erchess]

Hi Cathe

I don't think I read anything above that I disagreed with. But it does seem to me that you need more information than you are likely to get on this board. I have two suggestions as to where you might get it.

First of all there just has to be some kind of national and some kind of state association of bed and breakfast owners. Perhaps you can find them on your favorite search engine or perhaps she is already in touch. They might or might not be a source of valid tax information but if they do not provide valid tax information then almost surely they are providing her and will provide you with invalid tax information and it would be useful to you to know what she's being told.

The other source of information would be the Internal Revenue Manual on B & B operations. That isn't unbiased or perfect but it gives us the thinking of the other side of the table given an audit. And let's face it you want to think three times before you knowingly go against IRS thinking on something.