Room and board can have several tax issues connected to it. It may be deductible in certain situations for those paying it. It can also be taxable for those who receive it free or at less than market value. Many tax issues arise when an employer provides an employee the fringe benefit of lodging and food.
In most situations, room and board is treated no differently for tax purposes than any other housing or food cost. It is considered a personal expense and not deductible for tax purposes. When people receive free room and board from anyone but an employer, there are also no tax issues. However, if an employer provides room and board for an employee, it is considered a fringe benefit and, depending on the circumstances, may be taxable.
Non-Taxable Room and Board
If an employer provides an employee with lodging and meals, it is not considered a taxable fringe benefit to the employee under a specific set of criteria. First, the room and board must be provided on the employer's work premises. A common example of this is when a family hires a live-in nanny. The nanny lives in the home and eats meals there. The second criterion is that the lodging must be intended for the employer's benefit. This means it is easier for the employer to have an employee on site at all times than live off site. The final criterion is that the employee must accept the room and board as a condition of employment. In other words, the employee is required to accept the room and board to get the job. If all of these conditions are met, the employee does not have to pay tax on the value of the free accommodations.
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Taxable Room and Board
If an employer offers room and board to an employee and it does not meet the above criteria, it will be considered a taxable fringe benefit and part of the employee's income. The value of the benefit is calculated by the employer and included as income on the employee's W-2 form at the end of the year. The IRS considers this type of arrangement as just another way to pay employees without giving them cash.
Deduction for Room and Board
In most situations, what a taxpayer pays out of pocket for room and board is not deductible for tax purposes. However, if the person runs a home-based business from the premises, the portion of the lodging cost that relates to the space only used for business purposes may be deductible against business income. The meal portion of the total room and board is never tax-deductible and is considered a personal expense.