The Truth About the Augusta Rule
We have several clients that have recently asked about the Augusta Rule. The Augusta Rule (IRC Section 280A(g)) is a way to pay yourself from your business (S Corporation/C Corporation/Partnership) for renting your home to the business tax-free. It is heavily marketed as a slam dunk tax deduction.
The truth is many businesses have only benefited from the deduction because they haven’t been audited. The business must have a legitimate business purpose to rent the home. A legitimate business purpose would be a corporate event. For example, a team event, team meetings, a retreat, taking corporate minutes, or a private party for your clients and employees. Your business would pay for the use of your home, equivalent to using a hotel banquet hall or renting out a restaurant. Further, it can only be for 14 days or less.
The rent you pay must be at fair market value. So, if you are renting an office in your home to the business to have a team meeting for $15,000 and the fair market value is $2,000, if you were audited, the IRS would deny the expense.
Also, the business must issue a 1099 to you. Therefore, the IRS will be alerted of the rent paid and it will need to be shown on your individual return as both income and an offsetting expense. Therefore, if you are inflating the value of the rent paid, it could likely raise a red flag to the IRS.
Another point is that you can’t take a home office type deduction and the Augusta Rule. Much of the time, the home office deduction is greater than what is available through the August Rule if following IRS guidelines.
The Augusta Rule is a legitimate tax planning strategy but many times not the type of deduction that is being sold. Please talk to a qualified tax professional and remember if it sounds too good to be true, it most likely is.
