August Rule Section 280A

Everything You Need to Know About the Augusta Rule

Do you own a piece of real estate that your business could use? Did you know that there is a provision in the current tax code that allows homeowners to receive tax-exempt rental income? The Augusta Rule has been around since the 1970s, allowing both homeowners and businesses to enjoy favorable tax savings.

Understanding the basic components of the Augusta Rule and how your business can leverage this tax exemption is critical to not only reduce your personal tax liability, but to lower the taxable income of your business.

What is the Augusta Rule?

The Augusta Rule, referred to as Section 280A by the IRS, allows homeowners to rent their home for up to 14 days each tax year without being required to pick the money up as rental income on their individual tax returns. The Augusta Rule was originally placed in service for residents of Augusta, Georgia, where the Masters golf tournament was held. Now, this rule is widely used by both homeowners and businesses.

Who Qualifies for the Augusta Rule?

To leverage the tax advantages of the Augusta Rule, you must have a legitimate corporation. This means that sole proprietors and single-member LLCs are excluded from using this tax break. Partnerships, c corps, and s corps are the qualifying business structures that can use Section 280A. The good news is that you can change business structures if you want to take advantage of this rule. However, before making that decision, it’s best to consult with an expert to weigh all factors.

How Does the Augusta Rule Work?

When a homeowner rents their personal residence to a business or other individual for 14 days or less, the income does not need to be reported. This means that a shareholder of a corporation can rent out their personal residence to the business for a specific business purpose without being required to report the income.

Looking at an example can be beneficial. Let’s say you are the sole shareholder of ABC Corp, and you currently have a beach house in Tampa, Florida. Your company is looking for a place to hold a quarterly weekend retreat for employee training. You decide that ABC Corp will use your vacation home for 2 days every 3 months, totaling 8 days out of the year.

To use the Augusta Rule, you would need to look up the fair market value of homes in your area and charge ABC Corp that rate for each of the 8 days. ABC Corp will be able to write the rent paid to you off as a business deduction, while you are not required to report any income since you are under the 14-day exclusion.

Both you and ABC Corp benefited from tax savings. You were able to receive tax-free income, while ABC Corp was able to reduce its taxable income through rent payments made to you. Although the Augusta Rule can become more complex, this example shows the significant tax-saving opportunities for both the corporation and the homeowner.

What are the Specifications of the Augusta Rule?

The Augusta Rule does have specifications that need to be meticulously followed to ensure both the business and homeowner are staying in compliance.

Residency

The homeowner renting out the property must be renting a personal home. This means that a boat, condo, mobile home, house, apartment, and more may be a qualifying property if the individual claims that location as a personal residence. In addition, second homes and vacation homes do qualify, but the property must not be in the business name.

Qualifying Business Expense

In order to use the Augusta Rule, the reason for the rental needs to be a legitimate business expense. This interpretation can vary based on the industry your business is in. Nevertheless, common uses are private team parties, team events, retreats, corporate events, and business meetings. It’s important to note that the 14 days do not need to be consecutive, meaning you can spread the days out over the course of the year.

Fair Value Rent

The IRS requires that businesses pay the homeowner fair market value rent. This means that a home that the homeowner can usually rent for $1,000 should not be rented for $5,000 a day for the business. If the IRS uncovers this discrepancy, you may be required to report the full amount of rental income received as taxable income.

There are exceptions to the fair value rent rule in certain circumstances. For example, if you have a home near Raymond James Stadium in Tampa and they are the host of this year’s Superbowl, you will be able to charge significantly more for rent.

No Double Dipping

One of the main reasons that sole proprietors and single-member LLCs are excluded from taking the Augusta Rule is that they are able to take the home office deduction. The home office deduction utilizes personal residence expenses to reduce business income. If the homeowner were to use the Augusta Rule as well, taxable income would be understated.

Rental Expenses

Since income under the Augusta Rule is not subject to taxation, homeowners are not able to take any rental expenses, such as property taxes, insurance, utilities, and repairs. However, it’s important that you keep track of all the expenses associated with the rental in the event the IRS nixes your exclusion, and you are required to pay taxes on any income received.

How to Properly Rent Your Home to Your Business

There are best practices that you will want to follow to claim the Augusta Rule. For specific guidelines related to your situation, reach out to one of our team members.

Invoice the Business

Before the business uses a homeowner’s property for business use, there needs to be an invoice in place. The homeowner should be sending the business an invoice for the rental income. Before the business pays the invoice, the invoice should move through the accounts payable function with no special treatment, having the correct parties sign off and issuing a check once approved.

The invoice is not only an important piece of documentation to claim tax-exempt treatment on the individual return, but also helps substantiate the expense that the business will claim. The invoice can be as formal or informal as necessary, but it should have the basic components, like a due date, identification of the parties, and amount due.

Having a template that you can recreate up to 14 times during the year will add uniformity to your Section 280A claim and helps prevent issues from the IRS. There are free invoice templates available online; however, our team can help you put together an invoice if needed.

Keep a Paper Trail

A paper trail is arguably one of the most important aspects of claiming the Augusta Rule. The IRS wants to ensure that the transaction is occurring at arm’s length, meaning there is proper independence between the two parties. A paper trail generally starts with an invoice and includes a check from the business that will be deposited into the homeowner’s bank account.

The more documentation you keep, the better. In addition, your business may be required to issue a 1099-MISC for the rental income paid to the homeowner. This tax form is required to be filed with the IRS. Furthermore, there should also be documentation explaining the type of business conducted while the property was rented, such as a meeting or team training.

How is Section 280A Reported?

On the business side, Section 280A is reported as a regular business deduction. Depending on the use of the home, business owners have some leeway in the account classification. Common categories include employee benefits, training, and rent. If your business is issuing a 1099-MISC to the homeowner, you should classify the amounts as rent expense. There are no additional forms that the business needs to fill out to claim the rent expenses.

There are some differences in the way individuals can report the Augusta Rule on their individual tax returns, making it important to talk to your tax advisor. Some individuals choose to report the entire income amount received from the business as rental income and then create an other deduction line item called “non-taxable income under IRS Code Section 280A” and others will forego reporting the income altogether. To find the best route for your situation, reach out to a tax advisor.

What are the Benefits of Claiming the Augusta Rule?

The Augusta Rule is a great tax planning strategy for homeowners who don’t regularly rent out their property and for business owners looking to reduce taxable income. If you have a property in a popular location, you can save thousands of dollars in self-employment and ordinary income taxes. Moreover, claiming the Augusta Rule allows you to give your business a place to house business meetings, seminars, and events.

The business enjoys reduced taxable income from claiming the rent amounts paid as an expense. Additionally, depending on the fair market value rate of the property, your business may save money on renting a space for business use. With the housing market and event locations skyrocketing in price, having an area that you can use might be more cost effective.

How Does an Accountable Plan Help?

An accountable plan is an outline that is designed to ensure compliance with IRS regulations for reimbursing workers for business expenses that are not considered taxable income on the workers’ individual returns. Applying an accountable plan to the Augusta Rule can help both the homeowner and business stay in compliance with Section 280A. General accountable plans promote compliance with the following three standards:

1.     Expenses are related to the business.

2.     Expenses have supporting documentation and are paid within a reasonable time.

3.     The individual who receives overpayments correctly returns the funds to the company.

If any of these three stipulations aren’t met, the reimbursement doesn’t qualify for the accountable plan. This means that the rental income will become taxable for the homeowner. An accountable plan makes sure your business stays on top of compliance with IRS Section 280A by defining the procedures and processes to follow.

Why Should Businesses Have an Accountable Plan?

Although businesses are not required to submit their accountable plans to the IRS, they must be able to demonstrate that they are following the proper regulations. An accountable plan helps ensure the money you are paying is properly treated as tax-exempt to the recipient.

In addition, the Journal of Accountancy describes that an accountable plan is a vital tool to encourage employees to promote business goals. When there are clear rules in place, your business has the information needed to substantiate IRS Section 280A claims and avoid the IRS nixing the business deduction and rental income exemption.

Moreover, businesses that utilize the Augusta Rule with a shareholder or part owner are subject to increased scrutinization. The IRS doesn’t want business owners to be engaging in tax evasion through the Augusta Rule. With an accountable plan with well-defined terms, you increase your chance of successfully supporting your position.

Working With Us

Does it sound like your business can take advantage of the Augusta Rule? Homeowners are able to leverage the 14-day exclusion each year, providing the business with a space to conduct qualifying activities and reduce taxable income.

Properly recording and reporting the details of the rent is important to stay in compliance with Section 280A, especially if you are using the home of a shareholder or owner.

At Tandy Consulting Inc, we offer monitoring, lease agreement setup, and research on FMV rental prices, providing you with a comprehensive package to ensure your business is following the proper legislation. Reach out today to learn more.

Sources

Cornell Law School. “26 U.S. Code § 280A – Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.” Cornell Law School, 2022, https://www.law.cornell.edu/uscode/text/26/280A. Accessed 6 Dec 2022. 

IRS. “Business Structures.” IRS, 27 Oct 2022, https://www.irs.gov/businesses/small-businesses-self-employed/business-structures. Accessed 6 Dec 2022. 

Roane, Dayna. “Start or review an accountable plan.” Journal of Accountancy, 1 Feb 2020, https://www.journalofaccountancy.com/issues/2020/feb/employee-expenses-accountable-plan.html. Accessed 6 Dec 2022.