Free Housing for Farm and Vineyard OwnersFree Housing for Vineyard Owners?
(Farms and Ranches, Too!)
Section 119, Explained
Many writers have discussed the need to organize vineyards and wineries as separate, but commonly owned limited liability companies. The benefits are obvious:
- Permitting the vineyard to use cash basis accounting with consequent higher income tax deductions during pre-production;
- Insulating the risks of a winery and its tasting room from the ownership of the vineyard;
- Providing more accurate allocation of value between the farming aspects and the production and sales aspects of the business.
However, few vineyard owners who actively manage their vineyards realize that they are eligible to receive a tax-free housing benefit which is completely deductible to their vineyard operations.
Internal Revenue Code Section 119 permits an employer to provide housing, and to deduct the housing expense, for meals or lodging furnished for the convenience of the employer. In the case of lodging, the employee must be required to accept the lodging as a condition of employment, and the lodging requirement must be reasonable and necessary for the employer’s business operations. Of course, the lodging must necessarily be on the employer’s premises. 26 U.S.C. §119.
The classic case arose in the context of a pig farm and granary operation! The pig farmer needed someone to be on call, 24/7, in case of a veterinary emergency, attempted theft, or other emergency during farrowing season. At other times of the year, someone had to be on call to monitor grain drying progress to prevent loss due to rot. His idea was to hire himself to do what he was already doing as an owner, but to pay himself as an employee and to provide himself a place to live on the farm while he was on call. J. Grant Farms, Inc., v. Commissioner, 49 T.C.M. 1197 (1985).
Vineyard owners, farm owners, and ranch owners can make this work by setting up a separate entity; an “S” Corporation to act as the vineyard manager. The corporation is paid by the vineyard/farm/ranch LLC to manage the LLC’s operations. The management corporation rents a dwelling from the LLC – located in the farm, ranch, or vineyard – and pays the owner/manager a salary and benefits for his/her 24/7 services. The benefits include a non-taxable housing benefit for the owner/manager under §119.
The rental expense is deductible rental expense for the management corporation and the rental income recognized by the farm/ranch/vineyard LLC is offset for the high level of deductions (including depreciation expense) that these businesses typically enjoy. To withstand audit, the different entities must be structured correctly; a reasonable, written rental agreement must be executed; and, the management company and the owner/manager must enter into a written employment agreement.
Please call Frank R. Acuña at Acuña ❖ Regli for more information or for help structuring your farm, ranch, and vineyard operations for maximum pre- and post- tax profitability. (925) 906-1880, or ContactUs@AcunaRegli.com.