The Augusta Rule is like the ultimate pot of gold at the end of a rainbow to business owners. It has everything business owners dream of.
It’s a way to pay yourself tax-free income for renting something you already own, your home. And the cherry on top is that your business gets to take that expense as a tax deduction, which reduces your overall taxable income and saves you even more in taxes.
It’s a great tool if used under the right circumstances, but it’s often abused and marketed as a “little-known tax scheme only used by the wealthy.” In reality, most businesses don’t use the Augusta rule because they won’t ever face a scenario where they’d rent their homes for legitimate business use.
Where does the name come from?
The origin of the Augusta Rule comes from the Master’s golf tournament that is held each year in Augusta, GA. Residents of Augusta wanted to earn some income by renting their homes to the fans coming in for the tournament.
They lobbied that this wasn’t a full rental business; they only wanted to use their homes as short-term rentals during the tournament days. Eventually, the IRS created section 280A of the tax code that allows homeowners to rent their homes for 14 days or less without having to report it as income.
As if that wasn’t enough benefit already, business owners started to think about it from their side. They were paying rent to other businesses to use their space. What if they could pay rent to themselves, use that business expense, and have income that they didn’t need to report? And since then, no less than 10,000 TikToks, YouTube videos, and Twitter Threads have been made about the so-called “loophole”.
How can I use it to my benefit?
In order for it to be a legitimate business expense, there has to be a legitimate business purpose for the payment of rental income to yourself.
Depending on your industry and your relationship with your clients, this could mean different things. Think corporate events, meetings, retreats, team events, or a private party for your team or customers. But instead of paying the local banquet hall or renting out a restaurant, your business pays you rental income, just like you would to another 3rd party. The Augusta Rule allows you to rent your primary residence for 14 days or less in a tax year without claiming the income on your personal income tax return.
What’s the catch?
The rent you pay for the evening must be at fair market value. For example, if you pay yourself $20,000 for an event that would have normally cost you only $1,000 in rent, the IRS will not allow that expense if your tax return is audited. I suggest researching to find comparable estimates and saving them as documentation for your records.
You cannot use this strategy if you are a sole proprietor or single-member LLC. You must have an LLC or Corporation that is taxed as an S-Corporation or C-Corporation or Partnership, set up with a separate EIN. The IRS does not allow businesses that file their income and expenses on Form Schedule C to use the Augusta Rule.
If you take the business use of home deduction already, you cannot also use the Augusta Rule.
The business should issue you a 1099-MISC if the payments during the year are over $600. The problem is that the IRS will also get a copy of that, so you can’t just leave it off your income tax return. So it would be best to show it on your tax return and then show a corresponding expense to reduce it to $0 taxable income with a note referencing the IRS tax code you’re utilizing. This is where it gets tricky because now you’re asking for the IRS’ attention.
But if your documentation is all together, you should have nothing to worry about. But often, we find that clients are very interested in taking advantage of this rule until they find out that there has to be a legitimate business use for the rent and that you are opening yourself up to potential questions from the IRS because you have to report it on your personal income tax return, even if you don’t actually pay taxes on the income received.
When considering strategies and plans like this, don’t forget that lots of people have only gotten away with these types of strategies because they haven’t been audited yet.