The Augusta Rule: Tax Benefits for Business Owners

Getting its name from the town it was first implemented in, the Augusta Rule is a nifty way to get a tax break for renting out your home. It’s as simple as this: if you rent out your house for less than fourteen days per year, you don’t have to report the additional income on your taxes.

While this is useful for homeowners that could rent out their homes while on vacation, it also offers a unique opportunity for business owners to rent out their houses as well – and potentially to their own businesses.

Let’s take a look at the Augusta Rule and the tax benefits from renting your own home office:

How Can Small Businesses Benefit from The Augusta Rule?

After the initial release of the rule and a little bit of creative application on the end of business owners, it was put together that a business owner could rent their home space to their business and pay themselves rent, use it as a business expense, and have income that they didn’t need to report. 

Of course, it’s not just an easy way to earn money – it needs to be a legitimate business expense. Essentially, you need to have a true purpose for your business to rent out your home space. Depending on your business, this could mean different things. You could utilize the space for things such as:

• Private parties for teams and customers
• Team events
• Meetings
• Corporate events
• Retreats

For anything that you may need to rent space for, you could alternatively rent out your home – assuming your home is an appropriate space for that specific event. Your business would then pay you rental income like you would if you were renting any other space. 

What Are The Restrictions Regarding The August Rule?

First, you have to pay yourself a fair market value for renting your space. You can’t try and pay yourself $10k for a space or event that would typically only require $1k. That’s a big no from the IRS. To avoid this debacle, find comparable spaces and past events for a realistic estimate and save these in your records in case you’re audited. 

Another restriction is that you cannot take advantage of this rule if you’re a sole proprietor or single-member LLC. You need to have an LLC or Corporation that is taxed as an S-corp, C-corp, or Partnership and set up with a separate EIN. Also, if you take the business use of home deduction already, you can’t take advantage of the Augusta Rule. 

And, lastly, you’ll want to ensure that you have all the necessary documentation in your records for every aspect of the process – including your personal and business records for the exchange. This is to prep for the possibility of being audited or misfiling your papers and being inspected by the IRS. 

How to Safely Utilize The August Rule for Your Business

As always, the safest way for you to utilize the Augusta Rule for your business is to contact a tax professional and consult with your accountant and bookkeeper. This will ensure that you have all the appropriate information and documents required along with a go-to place to keep your paperwork safe. 

Plus, consulting with your accounting and bookkeeping department will help you make an educated decision on if you can even use the Augusta Rule in your business – and the best way to do so. 

If you do not currently have a tax professional, accountant, or bookkeeper to consult, reach out to ModVenturesLLC today.