As of 2010, there are over 20,000 bed and breakfasts operating in the United States. A bed and breakfast is a small lodging establishment that usually offers only breakfast as a meal. In addition to a new source of income, opening a bed and breakfast can turn some of your current expenses into a business tax deduction.
You can deduct anything that is ordinary and necessary for your bed and breakfast. Some of the more common deductible items include cleaning services, the cost to supply meals to patrons and insurance premiums. You also can deduct magazines, a business phone line, the use of your car to pick up patrons from the airport and the wages you pay to employees.
One of the most valuable deductions for a bed and breakfast is depreciation of the parts of your home used exclusively for business, similar to any other company asset, such as a car. However, you cannot use the rooms for anything other than business. For example, if you sleep in a room frequently, you cannot deduct it as business real estate because it is no longer used exclusively for business. You also cannot deduct common areas, such as a living room.
The IRS has special rules for employing family members, which may reduce your payroll taxes. If you employ a child under the age of 18 and run a sole proprietorship or partnership, you do not have to pay Social Security or Medicare taxes. If the child is older than 18, you do not pay federal unemployment taxes. You also can employ your parents and not pay taxes either, according to the Internal Revenue Service.
Consult a tax professional to maximize your benefits and ensure you follow IRS regulations. For instance, many professionals suggest entrepreneurs create one company to own the real estate and have that company lease it to another entity that operates the bed and breakfast -- this way you can deduct lease payments as a business expense. You also need to go through your expenses to determine which need to be capitalized and depreciated. For instance, you must deduct assets such as curtains and kitchenware over several years rather than all at once.