The Augusta Rule: Can Your Business Rent Your Home for Tax Savings?

Imagine holding a legitimate business meeting in your home, having your company pay a reasonable rental fee, and receiving that rent without adding it to your taxable income. That is the basic idea behind the strategy commonly called the Augusta Rule.

The opportunity comes from Internal Revenue Code Section 280A(g). When you use a dwelling as a residence and rent it for fewer than 15 days during the year, the IRS generally does not require you to report the rental income. The IRS explains this special rule for homes rented for fewer than 15 days.

When the renter is your business, the business may also deduct a properly supported rental payment if the expense is ordinary, necessary, reasonable, and connected to a legitimate business purpose. That combination can create an attractive result, but only when the arrangement is established and documented correctly.

How the Augusta Rule can work

Assume your S corporation holds four quarterly planning meetings at your home. Comparable local meeting space rents for $1,000 per day. If the corporation pays you $4,000 for four properly documented rental days, the corporation may deduct the $4,000 rental expense. You generally exclude the $4,000 of rental income from your personal taxable income because the home was rented for fewer than 15 days during the year.

The numbers must reflect reality. The company cannot simply choose an inflated daily rate to manufacture a larger deduction. You should support the rate with comparable venues, quotes for similar meeting space, or another credible market analysis.

Who may be able to use this strategy

The Augusta Rule is most commonly considered when an owner has an S corporation, C corporation, or partnership that is legally separate from the homeowner and has a genuine reason to rent the space.

A sole proprietor generally cannot create a deductible rental expense by paying rent to themselves. The same concern usually applies to a single member LLC that is disregarded for federal income tax purposes. Entity structure matters, which is one reason this should be reviewed as part of a broader proactive tax planning strategy rather than treated as a stand alone year end transaction.

What counts as a legitimate business use?

The rental must serve a real business purpose. Depending on the facts, appropriate uses might include an annual planning retreat, management meeting, board meeting, employee training session, or other substantive business gathering.

Calling a family dinner a company meeting does not make it deductible. Entertainment expenses are generally nondeductible, and a personal or social event does not become a business expense merely because some business topics are discussed.

Documentation is not optional

A defensible Augusta Rule arrangement should include all of the following:

·         A written rental agreement between the homeowner and the business

·         Evidence supporting the fair market daily rental rate

·         A meeting agenda prepared before the event

·         A list of attendees and the business purpose

·         Meeting minutes, notes, or other evidence showing what occurred

·         Proof that the business paid the rent and the homeowner received it

·         A reliable count of every day the home was rented during the year

The payment should flow through the books like any other real business transaction. A journal entry created after year end, without an agreement, payment, or evidence that a meeting occurred, is much harder to defend.

Common mistakes that put the deduction at risk

The most common problems are charging an unsupported rate, exceeding 14 total rental days, using the home for a personal event, failing to document the business purpose, or trying to use the strategy through an entity that is not separate from the homeowner for federal tax purposes.

Another mistake is assuming the rule applies only because the property is residential. Section 280A(g) applies to a dwelling unit that the taxpayer uses as a residence. A property operated primarily as a rental may not satisfy that requirement. Vacation homes and mixed use properties require closer review because the personal use and rental use rules can change the result.

Tax planning works best before the meeting occurs

The Augusta Rule is not a deduction to invent while preparing the tax return. The business purpose, rental rate, agreement, meeting records, and payment should be established during the year. That is the difference between proactive planning and trying to reconstruct a strategy after the fact.

At T. S. Allen & Associates, we help business owners evaluate tax strategies in the context of their entity structure, bookkeeping, payroll, and overall financial picture. Learn more about our accounting and tax services for small and midsize businesses or review our typical monthly service pricing.

If you are a business owner and want year round guidance instead of last minute tax surprises, contact T. S. Allen & Associates to discuss whether our firm may be a good fit.

This article provides general information and is not tax or legal advice. The proper treatment depends on your entity structure, property use, business purpose, state law, and documentation.