Are they even registered with their State? Did they get FEIN?

"I set up the home as being rental income to mom and dad"

You can't rent your own house to yourself and pay yourself rent.

"in the amount of the cost of property tax and utilities (mortgage is paid in full) and the % of depreciation, with the expenses being just the %."

Are you explaining the business use only? And is that exclusive, and not "this corner of the kitchen and the shelves in the garage?"

"Sounds like I should book the son's room and board as "partner draws" in the books, and issue that as income."

Did the parents take these amounts from the business in lieu of "room and board" from the son?

There seems to be a whole lot wrong here.