The Gray Area
THE GRAY AREA When we are onboarding clients, we often hear that they “want to take advantage of the gray area of the tax law”. So, what is this mythical gray area? While voluminous, the tax code does not speak to every single deduction one can have. Some deductible things are spelled out clearly like wages, retirement, and other items. Some items are prohibited like country club dues. The gray area exists where the code has not addressed a specific situation. Does this mean a taxpayer can simply deduct anything and everything that falls into this gray area? It does not and the IRS accounts for this in Code Section 162. This section states that any deduction must be “ordinary and necessary” to the operations of a business. This code section essentially puts the burden on the taxpayer to demonstrate that any deduction meets the “ordinary and necessary” standard. While many tax newsletters make several claims of the deductibility of many expenses like children on the payroll, home office, automobile, and The Augusta Rule, they often leave out that ultimately these expenses must pass the Section 162 standard. This is not to say that [...]
The Augusta Rule
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: [...]
