Farm Students

[equinecpa]

Boarding farm labor is deductible-but what portion of their meals is deductible? Students come to farm to learn farm skills. They live with taxpayer. In return for room & board they work for free. Are the meals 50% tax deductible or fully deductible?

[Nashville]

Further Ramifications

Wish I could give you a flat answer, but the question can become even more muddled. Here's why:

a) I believe the farmer must give the students a W-2. Let's suppose the value is $15/day for 100 days. Student gets a W-2 for $1500. If meals are only 50% deductible, does this mean the farmer gets to deduct only $750. Doesn't sound fair, but might be. Somehow I think the $1500 is deemed to be wages, and wages would be fully deductible, especially if farmer has to pay 7.65% FICA/Medicare on the entire amount.

b) It gets worse. A neighbor of mine got audited by an agent who came to his farm. Neighbor was boarding some shell-shocked WWII veterans at the time and feeding them. Agent did not apply 50% reduction to neighbor's deduction, but since they were growing much of their own food, he allowed only the cost of what came from the garden (prorated by # of heads in the household), plus whatever they could prove from the grocery store. Very bad. Agent also had bad taste enough to inform them that he (the agent) was receiving a fat per diem from the govt and didn't even have to save his receipts.

There is a somewhat ironic end to the above story. Farmer was housing EIGHT of these veterans and feeding them, and the VA was paying the bill. At the time this was around $35-$40K annually and farmer was being taxed on the income. Veterans were living a bucolic life out in the country with familiar companions and away from pressures. After the audit, farmer called the VA and told them if the auditor assessed him, the VA could come take the veterans and find another home for them. For whatever reason, the audit assessment never happened.

Soooooo, the question has been extended to the effect of meals on deductible salaries, and actual cost of meals instead of per diem.

My best guess would be if the farmer issues a W-2 to the students, he can deduct whatever amount is on the W-2, covering any number of possibilities as to how the amount was calculated. And of course, farmer must pay his share of payroll taxes, also deductible.

[Roland Slugg]

IMO the cost of the meals is 100% deductible. If the farmer is getting paid or reimbursed by someone ... the students, their parents, the school, perhaps a government program ... then those payments are income to the farmer, and the meals are fully deductible. It's really similar to a restaurant.

Even if the farmer is not paid or reimbursed, per se, he is still deriving an economic benefit from the quid-pro-quo arrangement. "You work for free, learn a little about farming, get free R&B, and I will get free labor in exchange." In that case the meals are the equivalent of those furnished for the convenience of the employer, even though the "employer" in this case has no employees and pays no wages ... at least to the student farmers.

It might be helpful to read Code §119 and related Regs.