You need trusted business & accounting advise, that is why I thought you would enjoy this post from Mike Jesowchek, CPA at TaxElm.

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by Mike Jesowshek, CPA

Do you use your home for business events such as shareholder meetings, team retreats, client meetings, employee meetings, etc? If so, this is one tax strategy you definitely want to be check out!

The 14 Day Home Rental / Augusta Rule is a piece of the tax code that allows you to potentially shift taxable business income to tax-free personal income. This is one tax saving strategy we often see small business owners overlook.

What Is The 14 Day Home Rental Strategy (aka The Augusta Rule)?

The Augusta Rule came into existence because folks were renting out their homes for a week for short term events (golf tournaments, Superbowl, etc) but they were stuck paying taxes on that. These folks got upset they had to pay taxes on this rental income when they were not really full-time rentals but rather a very short amount of rental days. This is when the Augusta Rule was put in place.

Now, based on tax code, if you rent your home for 14 days or less you cannot write off the expenses attributed for that rental use BUT you also do not have to include that as rental income either.

It reads like this:

• Tax Code: section 280A(g): Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then—

  1. no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and

  2. the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.

Essentially, when you rent your personal home for 14 days or less in a calendar year, that income is not taxable. This is true even if you rent the home to a business you own.

What You Need To Know About The Augusta Rule

As a business owner you can take advantage of this rule when using your home for retreats, meetings, client events, etc. Basically, if your business would normally pay for a rental space you could use your home as that rental space.

Your business can take the deduction as a business expense and you, personally, would get some tax free income.

If you want to take advantage of this tax strategy there are a few things you'll need to know.

• You can rent your home to your business for a valid business reason.

• Must be 14 days or less.

• Must be a personal residence.

Your business must be a separate legal entity (a sole prop is the same as you and you cannot rent the house to yourself).

What Do I Need To Do To Use The Augusta Rule?

You need to do more than just write yourself a check and move on. First off, you'll need to have a qualifying occasion or legitimate business reason for the rental. (Examples: shareholder meetings, retreats, client events, etc.)

Also, the rental rate must be a fair market value. You might need to take some time to figure out what market rent in your area is for similar meeting locations. Consider what you've paid in the past for your events.

If your business pays you more than $600 in a tax year, you need to have your business issue you a 1099-MISC to yourself. You can then zero it out on your Schedule E - it will not be included in your taxable income.

Note: This has no effect on the home office deduction.

As you can see, this is a great strategy to get a business deduction and pay no income taxes on that income received. Essentially, it gives you a way to shift income from your business to you, tax free.

Here is a quick hit list of steps we suggest:

1. Document Rental Reason and Keep Documentation for Proof

2. Determine Reasonable Rental Rate w/ Backup Proof

3. Execute Lease Agreement

4. Make Payments

5. Process 1099 and Zero Out on Personal Return

6. Keep Documentation on File

Common Use Example

Business owners often hold events for their employees and clients. In doing so, they often rent spaces to host these events.

For example, let's say that you host an annual retreat with your management team for annual planning and team building. This year, instead of renting a house on Airbnb, you decide to open your own home for the event.

Your business can rent the house from you for the week - as long as the event is for a legitimate business purpose and it pays fair market rent this transaction.

This will be a deduction on the business tax return and tax free income on your personal income tax return.

Another use case we see often is monthly, quarterly, or annual board meetings. This would be where you get your board together on a regular schedule to discuss current and future business items and utilize your house to host these meetings. You could use the cost of a board room rental at a local hotel or co-working space as your fair market value rental rate. 

If you held a monthly board meeting and a fair rental rate was $750 that would be $9,000 you just shifted from taxable income to tax-free income.

Why Is It Called The Augusta Rule?

The practice of renting your primary residence for a week or two each year became popular in Augusta GA during the annual masters golf tournament. Residents of Augusta Georgia would rent their homes to the attendees of this popular event.

Now this tax break applies to any primary residence in the US.

What If My Home Is Also My Primary Place Of Business?

If your home is your primary place of business then you're out of luck on this rule.

To be a legitimate business expense your business would have to pay rent for the space, which it would not do at its normal place of business.

Can My Business Rent My Vacation Home?

Yes, section 280a simply states that the dwelling can only be rented for a maximum of 14 days per year.

So if you want to have an annual company retreat at your beach home, you can rent your vacation home to your business and receive some tax free rental income for yourself and a tax deduction for your business.

Keep in mind that expenses related to the rental can not be deducted.

Also, the rent payment must be at market rent. If homes in your area rent for $500 a night, you can't charge your business $1,000 per night.

Do I Need A Formal Rental Agreement?

It is highly recommended you get a rental agreement in place when taking advantage of this strategy.

You'll want proof that your business did in fact rent your home and that the business paid market rent for the space.

Summary

The Augusta Rule can generate some tax savings for your business and give you, the business owner, some tax free income.

Keep in mind, you'll need to charge fair market rent and use the space for legitimate business purposes.

Of course, there are some key things that you need to do to ensure that this is done right and you are clear of any risk during an audit.

As part of our Tax Minimization Program we discuss this strategy as well as a full implementation guide, sample lease agreement, spreadsheet for recording activity, etc. Be sure to sign-up for our program if you want access to that information.