Here’s a valuable tax strategy, commonly known as the Augusta rule. It may help business owners generate tax-free income while claiming a legitimate business deduction.
What Is the Augusta Rule?
If you own a business structured as an S corporation, a C corporation, or a partnership, you may rent your personal residence to your business for up to 14 days per year. When this is done correctly, the results are highly favorable. Your business deducts the full rental expense while you personally receive the rental income tax-free.
For example, if your home rents for $1,500 per day and your business rents it for 14 days, your business can claim a $21,000 deduction. That deduction reduces business income. In the case of an S corporation or a partnership, it reduces income that flows through to you.
On your personal tax return, you report the $21,000 as taxable income, then subtract it under the 14-day rule, so your net result is zero tax on the $21,000. Read more about additional tax-smart business strategies in our article, Turn Your Corporate Vehicle into a Tax-Smart Asset.
How the Augusta Rule Creates Tax-Free Income
While tax law supports this strategy, proper execution is critical. You must follow several key rules, including:
- Rent for a business purpose. The rental must be for legitimate business use, such as meetings, planning sessions, or employee events.
- Avoid entertainment use. Most entertainment expenses are not deductible, so the rental should not be for entertainment purposes.
- Charge fair market rent. You must charge a reasonable rental rate supported by documentation, such as comparable market data or an appraisal.
- Document the business activities. Keep detailed records of meeting agendas, attendees, and business activities to substantiate the deduction.
Failure to meet these requirements—particularly proving fair rental value and business use—can result in the IRS disallowing the entire deduction.
How We Can Help
Sterling Tax and Accounting is here to help your business with tax planning! Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket. If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes.
Learn how to proactively save on taxes by scheduling a call with our tax planning specialists.
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