Rental Income on Schedule E or C ?

[JohnH]

I think we've discussed this before (maybe the same client), but I can't find it. There is a local English language immersion school which boards students in private homes. These are not foreign exchange high school students - they are foreign adults whose employers pay to send them to the US to improve their English language proficiency & also get some cultural immersion. The school contracts with the local families to provide a bedroom, two meals a day, and transportation to & from the school daily.

Allocating depreciation, insurance, taxes and utilities are no problem. But the client is under the impression that they can deduct the food and the transportation costs and they also tell me the school says they can report this on Schedule E. So far, the school hasn't forwarded any information I requested to support this treatment. I am inclined to think this is rental income reportable on Schedule C because the client is providing meals and transportation. Of course, this means the client must pay S/E tax on the net income. Anyone know of any exceptions to this type of treatment? Or maybe I'm just being too rigid in my interpretation of the rules.

[BHoffman]

I'm curious:

1. Is this going to result in income or loss for the client? Is the client profit motivated?

2. Is the payment broken down by rent & utilities with any separation for food & transportation?

3. Are payments for food and transportation based on per meal or per mile, fixed per-diem price, or what?

4. What is the average length of stay of the boarders?

Pub 334 talks a little about boarding houses.

[JohnH]

Good questions.

1) It will result in income to the client either way (E or C).
Yes this is profit motivated, unlike foreign exchange programs for High School students
2) The payment is a lump sum ($750/month, prorated if less than a full month)
3) There is no breakdown - the client agrees to provide room, food, and transportation for the flat $750 payment
4) Average length of stay is 8 weeks

Thanks for asking.

[Roland Slugg]

Based on the facts you gave I'd say it's pretty clear that this is a Schedule C business, not a rental activity. The owner furnishes significant services to his guests ... 14 meals per person per week plus "taxi service" to and from the school each day. These are significant services over and above simple room rent, and IMO tips the scale solidly to the Schedule C side.

[Roberts]

An in-home daycare provider is allowed to deduct food they feed to the children and transportation provided for the children to and from school. Seems to me it is a reasonable expense since they have honestly included it in the fee they are charging.

I'd call it schedule C same as you would boarding or B&B type services.

a NOLO form says: "You’ll also be classified as running a hotel business if you provide substantial services that are primarily for your guest’s convenience, such as regular cleaning, changing linen, or maid service." Seems to me that's likely being achieved plus meals and transportation.