The Augusta Rule is a tax-deduction strategy that can save business owners, solopreneurs, and freeelancers thousands annually. By renting their home to their business under the Augusta Rule, self-employed business owners achieve dual benefits: they earn tax-free personal income and can deduct the rental expense from their business income.
The Augusta Rule, officially referred to as Section 280a by the Internal Revenue Service (IRS), originates from the Masters Golf Tournament in Augusta, Georgia. It was created as a clever incentive to create more housing for tourists come tournament time.
The rule allows homeowners to rent out their property for up to 14 days annually without recognizing the income on their tax return. This means homeowners can increase their income with no increase in taxes, as the rental income is tax-free.
Despite being borne out of Augusta, the rule applies to all homeowners in the United States.
If you own a business and a home, you’re overpaying on taxes every year by not using the Augusta Rule.
Here's how it works: You can rent your home to your business for up to 14 days every year. When your business pays you for using your home, you don't have to pay taxes on that money. Plus, your business can count this payment as a work expense, which saves money on taxes, too.
If you’re hosting an event, meeting, or any work-related activity, instead of renting out a hotel, conference room, co-working space, or restaurant, you can use your own house instead of paying for a different place.
As the homeowner, you do not have to claim the rental income so it's received tax-free. As a business owner, you can also get a tax deduction on the amount you pay in rental fees to yourself. This shifts taxable business income to tax-free personal income.
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1. Shifting Income: By charging your business a reasonable rent for the use of your home, you're effectively shifting income from your business to your personal tax situation, without incurring additional tax liability.
2. Hosting Business Events at Your Home: Consider hosting business-related gatherings directly at your home. This allows your business to pay you rent for the use of the space. Provided these rental periods do not exceed 14 days in a year, the income you receive is tax-free.
3. Expense Deduction for Your Business: The rent paid by your business for the use of your home can be deducted as a business expense, potentially lowering the overall taxable income of your business.
Of course, like all strategies, the Augusta Rule has its limits.
1. Your home must be your primary residence: You can only take this deduction if the home used is your primary residence. The house must be under your name, and listed as your primary residence.
2. 14 day maximum: You can only rent out your home, tax-free, for up to 14 days. If you rent out your home for more than 14 days, any days outside of the 14 would count as taxable income.
3. The rental amount must be reasonable: Your rental cost should be consistent with other rental prices in your area. Don’t try to charge $5,000 per night when your neighbor has their property listed for $250/night. Make sure to check sources like Airbnb for similar listings in your area.
4. Must be a corporation or partnership: You can only use this strategy if you have the tax status of S-Corporation, C-Corporation, or Partnership. Sole proprietorships or regular passthrough LLCs do not qualify. The business expense is not tax-deductible, but you can still rent out your home for tax-free income to others.
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To effectively leverage the Augusta Rule without attracting unwanted IRS attention, meticulous documentation is key. Ensure the following is documented:
1. Rental Rate Substantiation: You cannot charge unreasonably more than what it would cost to rent a similar home in the area. Document the source of your rental rate justification.
2. Rental Reason: Document your meeting or event. Make sure to note things like the purpose of the meeting, agenda, meeting notes, and attendees.
3. Invoice: Create an invoice from you, the homeowner, to your business. It should clearly state the rental amount and business purpose of the rental.
4. Process Rental Payment: Pay the invoice via check or transfer from your business bank account to your personal bank account.
5. Correctly Report on Tax Return: Process a 1099 for rental income from your business to you personally. Report on Schedule E of your personal return – but will zero it out if 14 days or less by referencing “IRC Section 280A”.
6. Consult a Tax Professional: Given the complexities of tax law, consulting with a tax advisor to navigate the specifics of your situation can ensure compliance and optimize tax benefits.
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The Augusta Rule presents a unique opportunity for solopreneurs to strategically manage both personal & business income in a tax-efficient manner. By understanding and applying this rule, you can save yourself thousands of dollars for doing things you’re already doing.
As always, ensure that your application of the Augusta Rule is compliant with IRS guidelines and supported by solid documentation and professional advice.
If you’re still unsure of how to take advantage of this rule, need a second opinion, or just hate doing paperwork, get in touch with us ASAP for a free consultation. Taxtoolbox makes saving money on tax-deduction strategies (Augusta Rule included!) as easy as a few clicks.
