Look out - a tax rule created to protect the residents of Augusta, Georgia might be a way for business owners to get a deduction for renting their personal homes to their businesses while getting tax free income for themselves.
What is the Augusta Rule?
The Augusta Rule (known by us numbers nerds as IRS Section 280A) was originally created to protect the homeowners of Augusta, Georgia from taxable income generated from renting their homes during the iconic Masters Golf Tournament. The rule states that you can rent your home for up to 14 days per year without having to claim that rental income as taxable.
As savvy entrepreneurs often do, business owners got to thinking if they could use this as a business tax advantage -and it turns out you can - as long as you play within a few rules.
How does it work?
Business owners can take a tax deduction for renting their personal homes to their businesses for legitimate business purposes without having to claim the rental income on their personal tax returns.
What's a legitimate business purpose? Think board meetings. company events like retreats, and holiday parties for your team or your clients. Instead of renting an event or meeting space for these, you can use your personal home. You get tax free income, your business gets a tax deduction. Win-win.
But it’s not that straightforward. There are a few things you need to watch out for.
What are the gotchas?
- The rent you pay yourself has to be at a fair market rate and considered reasonable. No jacking up the cost allowed!
- The home you rent cannot be your primary place of business - sorry WFH.
- You also can't take the home office deduction and use the Augusta Rule - it's one or the other.
- If you pay yourself more than $600, you need to issue a 1099 and report it on schedule E with a corresponding event expense. Make sure you’re also referencing the tax code (IRS Section 208A).
- Your business needs to be a partnership, S-Corporation or C-Corporation to take the deduction. Sorry Schedule C filers - this one is not for you
- The home doesn't need to be your primary home, but it does have to be in the US. Your vacation home in Costa Rica doesn't get to use this rule.
As with any business expense, you should document everything, and seeing that this is currently a loophole, you should document the ever living shit out of it. Records of fair market rental rates, meeting minutes, attendees lists, and anything else you can think of to substantiate your 208A claim should be kept on hand in case the IRS ever comes asking about it.
For now, the Augusta Rule is a tax loophole that businesses can use to create a deduction while giving their owners tax free income. Like with most loopholes, you should make sure you’re playing within the lines. The IRS is very good at finding loopholes and this one has exploded in popularity, so if you’re going to employ this strategy, we recommend having all your ducks in a row.
Have further questions about your potential Augusta Rule case? Feel free to book time with our team to discuss your particulars.