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Difficulty of care

Forum|Forum|2 years ago
October 2, 2023
2 replies
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Hi all,

My client has 6 qualified difficulty of care individuals that live with him and his wife 24/7. He created a single member LLC and pays an employee to help out.

The IRS states that one can exclude difficulty of care payments to the extent of 5 qualified foster individuals. The wording in this leads me to believe that they can exclude the income from the first 5 but would have to report the income for any individuals over 5. For example, if they get $600,000 a year for all 6, then $500,000 can be excluded.

The other caveat that throws a wrench in things, is that my clients own an assisted living facitilty separate from where they live. I came accross something that sounded like they would have a problem deducting these payments if this were the case. The only difference in the case I read about is that the foster care and business was under the same roof. In my client's situation, it is two separate locations.

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Best answer by qbteachmt

Thanks for the response!

The individuals that are placed in my client's home are all unrelated adults and meet the difficulty of care definition. All funds are received from a State organization.

My understanding is that if you house one of these individuals than none of the payments are taxable and you cannot deduct expenses. How I read section 131, is that you can exempt the income on up to five in qualified individuals.

From my research, a group home only applies to children but I could be wrong.

"and meet the difficulty of care definition"

"has 6 qualified difficulty of care individuals that live with him and his wife 24/7"

"and pays an employee to help out."

"a group home only applies to children but I could be wrong." <== yes, that is wrong. Adults and seniors can be in a licensed group home, such as special needs or assisted living or memory care or rehab (physical, surgical, mental, substance abuse).

"if you house one of these individuals than none of the payments are taxable and you cannot deduct expenses. How I read section 131, is that you can exempt the income on up to five in qualified individuals."

The difference is caring for a few people in the home and running a business in the home.

I think this is your translation: Six adults are placed in this licensed group home and they are receiving difficulty of care payments to be applied to their care. Your taxpayer has one employee who gets a W2 and is not getting paid as difficulty of care, but regular wages, since this person does not live in. Your taxpayer is running a business. There is no exclusion for the income and some expenses are deductible, but it is a shared environment (personal residence to your taxpayer, not like a commercial/industrial care or hospital type of group home). And it is typical for the admin to collect and control the Veteran's benefits, SSDI, even Unemployment, and give the adults an allowance, but the rest goes towards their care and regular life needs, so you need to watch for other sources of revenue and the allocation of write offs. For instance, there might be a USDA food program in place; I've seen this.

T

Terry53029

Intuit Community Champion

see link https://www.law.cornell.edu/uscode/text/26/131

A

Avs19Author

Level 6

What's confusing is that they use difficulty of care payments in the limitation section.

"Limitation based on number of individuals. In the case of any foster home, difficulty of care payments for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more than—

(A)

10 qualified foster individuals who have not attained age 19, and

(B)

5 qualified foster individuals not described in subparagraph (A)."

T

Terry53029

Intuit Community Champion

I would interpret that to mean if more than 5, then none is excludable. I do a few, but never have had a home, only individuals. maybe someone will jump in with experience with foster homes

qbteachmt

Level 15

"He created a single member LLC and pays an employee to help out."

Is this a licensed group home? You don't typically make a foster family into an LLC and you don't hire through the LLC for residential help. You hire a household employee, not an LLC employee.

And you mention both foster care and difficulty of care. Foster care income is not the same as difficulty of care income. Are they getting both, or only a specific one? Foster care payments are not reportable as taxable income, and on the other hand, there are no expenses to write against that (including that labor).

In my State, you would need to be licensed for that number of foster children, and at a certain point, you need to be licensed as a group home, especially if these are adult individuals placed in your care under a plan of care.

If these are adult individuals choosing to live in a communal environment, and that is being paid for by their regular income sources (vet, SDI, ABLE Trust, etc), not under supervision, then this is like a room rental income relationship?

Lots of mixed messages here.

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