A Tax Primer for Bed and Breakfasts

Abstract

To be considered a business and not a hobby, a B&B must be operated with the intent of making a profit. Personal expenses must be clearly delineated from business expenses for tax purposes, and exclusive-use rules apply to most deductible expenses. Certain expenses may be deducted in full on the owner's tax return but others, such as start-up costs, improvements, appliances, and furniture-including eligible antiques-must be depreciated over time (some exceptions exist). Cash deposits collected to secure advance reservations require special tax treatment as do inventories of goods purchased for resale. B&B workers may be employees or independent contractors, and it's imperative to know the difference. The B&B's legal status will affect many aspects of its tax liability as well as that of its owners, partners, family-member employees, and shareholders. B&B owners and operators should be familiar with the IRS's Audit Guide for Bed and Breakfasts, which can help owners understand what may be asked of them in an audit and what third-party information is available to the IRS. The guide can also enhance the quality of B&B record keeping.