"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.