MASTERING THE AUGUSTA RULE

In recent years questions about how “The Augusta Rule” works and how one can benefit have been a hot topic.  It has been touted by tax newsletters and on message boards as a tax savings strategy.  So, what is the deal on this tax loophole?

The rules come from IRS Code 280A(g) that allows for the tax-free rental of a person’s home provided that the rental is 14 days or less in a calendar year.  In short, your business can pay you rent for your home and take a deduction and in the meantime, you do not have to claim the rent that is being collected.

The tax courts recently weighed in on the relevancy of this strategy in Sinopoli v. Commissioner, T.C. Memo 2023-105.  In this case the corporation deducted about $300,000 as rent expense in exchange for 33 meetings conducted at the homes of the shareholders.

In the memo the IRS took the position that the deduction taken was excessive and that the documentation the business had was not sufficient to justify a rental expense of $300,000.  Instead, the reduced the amount of the deduction to $10,500.  There are a few lessons here:

• The Augusta Rule is indeed a valid deduction.

• The business needs to keep good records about the purpose of the meeting and what business was conducted at these meetings.

• The rental rate must be reasonable. In other words, you should do some research on how much it would cost to rent a similar space for a day in your area.  The reality is that a daily rate should be somewhere in the ballpark of $500 to $750 per day.

While this is certainly a valid deduction understand that you need to keep proper records for the usage and that the rate being charged is reasonable.  It’s not as simple as saying “put me down for 14-days”.