The Augusta Rule is a tax strategy that some business owners can take advantage of to save money for their business while getting a large tax deduction. This rule allows someone to rent out their home TAX FREE for 14 days or less in a year. As with most of the tax loopholes, you must meet the requirements and keep meticulous records.
The Augusta Rule can apply in many scenarios and be used anywhere in the US. The tax strategy gets its name from the original scenario, where residents of Augusta, Georgia rented out their homes during the annual Masters Tournament. While not originally designed to allow business owners to rent their home to the business, it applies nonetheless. This article focuses exclusively on how business owners can take advantage of the Augusta Rule since this is the trickiest to apply.
Know the Rules
The first step in implementing this tax strategy is to know the rules. First, the rent must be a reasonable amount that is supported by market research. An online search for similar properties is sufficient. Second, the property must be in the US. While it doesn’t have to be your primary residence, you can’t rent out your vacation home in another country. Third, the total days rented for the year must be 14 or less per property.
Document the Payments
It’s not enough to follow the rules to qualify for this credit—you must also properly document the rent payments. When you rent to your business, always have a formal rental agreement in place. The business must issue a 1099-MISC to you for the amount that was paid. The rent income must be claimed on your personal tax return and then excluded under IRS Section 280A (the Augusta Rule). Follow the proper documentation for these payments to successfully navigate an audit.
Substantiate the Activity
In addition to knowing the rules and documenting the payments, you must also be prepared to substantiate the business activity during the rental days, including meeting minutes, daily agenda(s), attendee list(s), pictures, etc. The more you can substantiate, the better. This is even more important for smaller businesses where retreats or board meetings tend to be informal.
Beware Common Pitfalls
There are many ways that the IRS can attack this strategy and disallow it in an audit. For example, if you also get paid rent for your home office, you’ll likely violate the 14-day rule. To overcome this, you must use an accountable plan to avoid generating more rental income. Other pitfalls include a lack of substantiating evidence or a deficiency in tracking and documenting the rental payments. Furthermore you can’t use this strategy if your home is your primary place of business.
The Augusta Rule is a complex tax strategy with many rules and requirements. However, the setup for this tax strategy only needs to be done once, and then you can execute it perpetually. In addition to the tax savings, it’s also a great way for your business to save money renting conference rooms and other accommodations for company events.
This article originally appeared on Forbes