Difficulty of care

[Avs19]

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.

[Terry53029]

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

[Avs19]

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)."

[qbteachmt]

"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.

[Terry53029]

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]

"then none is excludable...jump in with experience with foster homes"

That's why I offered some perspective. It's the same type of evaluation as for those individuals who get the W2 and some value on it is difficulty of care (a person they live in with) and some is not (tasks not covered or a different person not under that care plan), from their employer.

"would have a problem deducting these payments"

That's stated oddly. You either need to report the income, or you don't. Deduct from what?

Foster payments are not reportable and the expenses for that person are not a write off, any more than your own personal/family costs are a write off. It's assumed the payment rate meets the cost of basic needs. For instance, it is supposed to cover a basic clothing allowance (but those foster kids keep growing...).

Difficulty of care is always for services through a comprehensive care plan; not clothing and toiletries. That can be your own relative, or not. There still would not be an expense reporting component. There would not be foster payments along with difficulty of care for your own family member, for instance. This is how you would get paid for taking care of your special needs child which prevents you from being able to work outside the home, as an example.

And the person receiving the care, and housed under a foster placement, might also have Medicaid or CHIP coverage, so it's unusual for the foster parent to need to cover medical costs.

There is a number of persons that triggers Group Home, and that makes it a business operation, even if that is in the same home you live in. In some cases, though, that just requires the health dept to do a site inspection, check for smoke detectors and adequate emergency exists, and basic plumbing (health and welfare check). We've had a number of bad group homes in my State.

You can do research, if the taxpayer doesn't give you the info you need. Just contact the County and/or the State, because there likely is a placement agency relationship involved with all of this (except your own child for whom you have custody, of course).

You can research this, too. For instance, it doesn't mention which State, but this mentions if the entity is incorporated or not, and covers both foster payments and difficulty of care in the discussion:

https://www.taxnotes.com/research/federal/irs-private-rulings/letter-rulings-%26-technical-advice/gr...

[Avs19]

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.

[qbteachmt · Accepted solution]

"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.

[Avs19]

That makes sense. Maybe that's why there's an extent to 5 rule. 

Thanks for you time!