The Farm CPA: Employee Housing: The Best of Both Tax Worlds

January 27, 2016 02:15 AM
 
calculator taxes accounting (3)

Do you provide housing and meals to your employees? If you participate in the H-2A temporary agricultural workers program, you’re required to provide housing. As long as you follow the rules, offering housing is tax-deductible by the owner and tax-free to the employee. This is what we call the best of both worlds.

Non-Owner Employee Details. To obtain a tax deduction, you must meet several requirements. The employee housing must be for the convenience of the employer, located on the business premises and there must be a valid business reason for the housing.

The business-reason provision is easy to meet. Feeding livestock, providing equipment security and monitoring grain systems all are valid reasons. Paying for housing located in a nearby city is normally a taxable compensation to the employee, but to be tax-free, it must be provided to the employee on the farm.

When farmers provide housing on the premises, they can take advantage of several benefits such as:

  • Deducting all of the costs associated with maintaining the residence such as utilities, insurance, landscaping, taxes and interest.
  • Depreciating the residence over a 20-year period, since it is classified as a farm building. Many taxpayers assume the residence should be depreciated over 27½ years, but that’s the rule for residential rental real estate. 
  • Electing to deduct 50% of the residence in the year that it is built. This election is available for new farm residences constructed through Dec. 31, 2017. It drops to 40% in 2018 and 30% in 2019. After 2019, it disappears unless Congress extends it.

An Example. Suppose Farmer Jane builds a farm house for the new foreman for $250,000. She can deduct 50% of this cost on her tax return using bonus depreciation and take a depreciation deduction of $4,688 on the remaining cost. Thus, she can deduct $129,688 in 2016. 

In many cases, farmers also provide meals to employees. To ensure these are fully deductible and tax-free to employees, meals must be provided for the convenience of the employer on the business premises. Many farmers cook meals (or buy them in town) and have a sit-down meeting with employees to review farm operations while they eat. If the employer provided the meal to all employees, it’s generally deductible to the farmer and non-taxable to the employee.

If meals are provided with housing, they should include all meals provided to employees, their spouses and their dependents. Meals in this situation also include household items such as dishes and soap.

Owners As Employees. If you want to provide housing and meals to farm owners, it becomes more complicated. Under the federal tax code, you must have an employer-employee relationship, which sole proprietors and partnerships do not meet. 

S corporation owners, while employees, do not qualify because of an income-tax provision. Therefore, the only entity to qualify for deductions of employer-provided housing and meals is a C corporation. 

Potential Drawbacks. Besides having to comply with the rules, the greatest disadvantage to providing housing for employees is when you sell an employee’s house. If you individually sell your personal residence after living in it and owning it for at least two years, normally any gain up to $500,000 is tax-free.

If the C corporation ends up selling the house you have lived in for the past 20 years, and the tax basis 
is now zero, all of the gain is subject to regular corporate tax rates. This rate is likely in the 35% range for federal taxes, and many states will assess another 5% to 10% tax on the net gain. 

The Bottom Line. Providing housing and meals to employees (and even owners, if you operate a C corporation) can generate substantial and permanent tax benefits, but if you provide housing, remember you will still owe taxes when you sell the house. 

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Comments

 
Spell Check

Jason lindner
Wis dells, WI
12/26/2017 01:38 PM
 

  How has new tax bill impacted the employee / owner part of this article? Can you deduct a new residence if the c Corp owns the residence now? Thanks

 
 
Chris
Sterling, CO
2/16/2018 07:18 AM
 

  My mom is older and owns a farm and ranch. She wants to build a house for myself and my family so I can live there and take care of the farm. I will also pay her rent on the house can she still get tax deductions for building a house for a hired hand?

 
 
Eric Raver
Greensburg, IN
8/10/2017 01:24 PM
 

  Hi Paul, Great article and blog - lots of very helpful information. Could you discuss the tax implications of a C Corp leasing a house from a shareholder/employee and then providing that housing to the same shareholder/employee? Are there any issues with that? I assume in that case the shareholder would pick up the rent on their Schedule E and could deduct expenses they pay (i.e. property taxes, insurance), while the C Corp would deduct rent and other expenses (i.e. utilities). Would the shareholder also take depreciation over 27.5 years? Does anything change if the house is owned personally by the shareholder or in an LLC?

 
 

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