The Augusta Rule is one of the biggest tax loopholes for business owners. It’s so good that it almost feels illegal.
Here’s how it works.
Your business can pay you rent to use your own home for a work event for up to 14 days a year. It’s entirely tax-free income to you as the homeowner, and your business also gets a tax deduction for the expense.
What is the Augusta Rule?
The Augusta Rule is a tax break that lets you rent out your home for up to 14 days out of the year, completely tax-free.
Referred to as Section 280A by the IRS, the rule was originally created to protect residents of Augusta, Georgia during the annual Masters golf tournament. Millions of people visit Augusta during the tournament and, because there aren’t enough hotel rooms, homeowners in the area rent out their homes during the week.
Technically, when they rent out their homes, this would be considered as taxable rental income. However, in the 1970s, residents lobbied for the Augusta Rule tax exemption, and Section 280A was added to the tax code. Today, the Augusta Rule extends to all homeowners in the US, not just those in Augusta, Georgia.
The Augusta Rule for business owners
The Augusta Rule isn’t just for business owners. Any homeowner can rent out their homes for up to 14 days out of the year, tax-free. But if you’re a homeowner and you also own your own business, then you can double dip on the tax savings by renting out your home to your own business.
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 home to do the exact same things.
As the homeowner, you have the same tax break as if you rented it out to somebody else. But as the business owner, you can also take a tax deduction on the amount you pay in rental fees to yourself.
Business owners can this loophole to transfer business income to personal income, and essentially double dip on the tax savings. As the homeowner, you get tax-free rental income from your business. As the business owner, you get a tax-deduction for the rental expense you paid to yourself.
The “rules” around the Augusta Rule
If you want to take advantage of the Augusta Rule for your business, there are a few “rules” that you need to follow:
- Your home must be your primary residence: As a business, you can only take this deduction if the home is your primary residence. The house must be under your name, and listed as your primary residence.
- 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 days would be considered a taxable event.
- The rental amount must be reasonable: The IRS doesn’t let you just charge any ridiculous amount to rent out your home. For example, you cannot rent out your home to your own business for $10,000 per night when it would normally cost you $500 elsewhere. Your home rental cost should be consistent with other home rental prices in your area. The best way to accurately come up with a reasonable price is to check Airbnb listings for similar properties in your area.
- Your business must be an s-corp, partnership, or c-corp: You must have an LLC or corporation that is taxed as an s-corp, c-corp, or partnership. If your business is a sole proprietorship or single member LLC, you cannot take advantage of the Augusta Rule as a business owner. You can still rent out your home to other people and take the tax-free rental income, but the business loophole will not be available to you.
How to claim the Augusta Rule tax break as a business owner
Documentation is critical for taking advantage of the Augusta Rule tax loophole. You need to document the use of the space and how you derived the rental cost of your home.
Step 1: First, determine your eligibility.
As mentioned earlier, your home must be under your name and listed as your primary residence. Your business must also be an LLC or corporation that is taxed as an s-corp, c-corp, or partnership. Sole proprietorships and single member LLCs do not qualify.
Step 2: Come up with a reasonable price
You must charge your business a reasonable amount for renting out your home. You cannot charge unreasonably more than what it would cost to rent a similar home in your area. When determining your price, you must document how you reached the rental amount that was charged to your business. Taking Airbnb screenshots of similar home rental listings in your area for the same dates would work here.
Step 3: Document the purpose of the meeting/event
Document your work meeting or event and make sure to note things like the purpose of the meeting, agenda, meeting notes, and attendees.
Step 4: Create an invoice
Create an invoice from you, the homeowner, to the your business. It should clearly state the rental amount and the business purpose of the rental.
Step 5: Write the check
Your business should pay in the form of a check to leave a paper trail. You can pay with other methods, but paying by check is the cleanest way.
The Augusta Rule lets homeowners rent out their homes for up to 14 days out of the year, completely tax-free. Any individual can rent out their homes and they don’t even need to report the additional income on their income taxes.
The Augusta Rule also works as a tax loophole for business owners. If you’re a business owner who also owns your own home, you can rent out your home to your own business for up to 14 days out of the year. As the homeowner, you can claim tax-free rental income. As the business owner, you can deduct the expenses that you pay yourself from the taxable income of the business. Essentially, you’re transferring money from your business to your personal account without triggering a taxable event, and saving money on business taxes at the same time.
While any individual can take advantage of the Augusta Rule, if you want to use it as a business owner, your business entity must be structured as an LLC or corporation that’s taxed as an s-corp, c-corp, or partnership. Sole proprietorships and single member LLCs do not qualify. You must be listed as the owner of the home, and it must be listed as your primary residence.