Let’s say that you’re an owner of a small business and that you want to take advantage of any tax benefits possible. Let’s also say that you like to get the team together a few times a year — to give everyone a break from the office, to build culture, and to keep everyone on the same page.
Most people in that situation would look to some of the typical offsite facilities, like WeWork, hotels, and resorts. We have another idea for you to consider.
Rather than host company meetings or retreats at a luxurious resort, you may want to host them at your home.
Why? Because the IRS lets business owners rent out their primary residence or vacation home to the business for up to 14 non-consecutive days per year — without paying taxes on the rental income.
Tax Strategy: Augusta Tax Rule
The Augusta Rule was created in the 1970s for residents of Augusta, GA, home of The Masters Golf Tournament. Due to high levels of seasonal visitors during the tournament, many homeowners would rent out their home to tournament guests. However, since the tournament only lasted a few days, and since there weren’t many rental opportunities for the rest of the year, homeowners believed that they shouldn’t have to classify that income as full-blown rental income.
So, residents of Augusta, GA, proposed a change — and Section 280A was added to the IRS tax code. Lucky for us, the rule isn’t limited to Georgia residents. Any homeowner in the U.S. can potentially take advantage of this strategy.
As you might expect with anything that the IRS touches, there is lots of small print and many important details to consider. Let’s break it all down.
For business owners, the rental is established with a formal lease agreement between the business and residence owner. By renting out your home to the business, you can potentially move income out of the business and into your personal income. Thanks to the loophole, no taxes are paid on the personal side — and the business can still benefit from deducting the expense.
Of course, this strategy is most impactful when you rent your home out to your own business (which allows you to get tax-free income and a deduction on the business side). However, that use case is not your only option. If you prefer to stick with luxurious resorts for business meetings, you can still rent out your primary residence to someone else while you’re away. As long as it’s rented out for less than 14 days, you do not have to report the income.
Advantages:
- Allows homeowners to rent out their home for up to 14 days per year without having to report the rental income on their tax return.
- Can potentially reduce business taxable income.
Caution:
- The rent you charge must be reasonable. Research how much a comparable commercial rental would cost in your area — and be sure to retain supporting documents that show how you arrived at your reasonable rate. Side note: At the time of this writing (late 2021/early 2022), a Traverse City commercial rental might start at $1,000/day and go upwards of $5,000/day depending on the facility. However, this is case-specific and should not be taken as one-size-fits-all advice. Be sure to do your own due diligence!
- The residence must be located in the U.S. So those of you with a vacation home in the Caymans are out of luck on this one.
- Total rental period must not extend past 14 days.
- I will emphasize this again: You need to keep detailed documentation! Make sure that there is a formal rental agreement and that you have support for the reasonable rate you are charging.
- Expenses related to your home are generally not deductible in this scenario.
- Finally, your home must not be your primary place of business.
Savings Range:
$1,000–$9,000
Good Business: Augusta Loophole
For business owners who own a home, the Augusta Loophole is a fairly unknown strategy that provides unique tax benefits. The residence can be located anywhere in the U.S., and the rental income can be excluded from taxable income if the property was rented out for less than 14 days.
Here at TreMonte, we can help you figure out if your situation would benefit from incorporating an Augusta Loophole strategy into your tax plan. Reach out to a member of our team today!
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