Reduce Your Tax Bill with the Augusta Rule

Business owners implement every tax-saving strategy they can to reduce their tax bills. But they often miss out on Augusta Rule.

It is often overlooked and sometimes considered as a strategy for non-business taxpayers. However, it could potentially help businesses save a considerable amount in taxes

In this article, we will delve into what the Augusta rule is and its requirements. We will explain how it works and how businesses can use it to reduce their taxable income.

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What is the Augusta Rule?

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Augusta Rule, which is also known as Section 280A(g), allows homeowners to rent their houses up to 14 days per year tax-free.

That said, the rental income is not subjected to taxes. However, the expenses on the property due to this renting are non-deductible.

Let's take a look into the history of the Augusta Rule to understand its roots.

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Augusta is a city in Georgia where people used to visit during the Masters Golf tournament. It was a decent opportunity for homeowners to earn an income from their homes during this event.

However, they didn't want to pay taxes as normal homeowners on renting. The residents requested a special rule from the government so that they could rent their houses for several days tax-free. This rule was finally passed in 1976.

Fortunately, this rule isn't limited to Augusta or Georgia. Taxpayers anywhere in the United States can benefit from this rule. They can rent their primary, secondary, or vacation property, and they don't need to pay taxes on the rental income.

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Requirements

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There are certain requirements to reduce tax bills with the Augusta Rule.

• It should be the residential property of the homeowner. It could be primary, secondary, or vacation property.
• The rental period should not be more than 14 days in a year. It is permissible to have more than one tenant within the restricted period.
• There should be a proper written rental agreement between the homeowner and the tenant.
• The rent should be according to the market value, and there should be documents to support that.
• The owner should be able to produce evidence of the usage of the property by the business. It could be meeting minutes, notes, or any other document.
• The property should not be used as a primary place for the business. It can be used for meetings, events, coaching, etc.

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You have to follow these rules to qualify for the Augusta Rule. It is because the rule is made for specific reasons, as discussed in history. The IRS makes sure that the rule is not misused, and you can also face penalties in the worst cases. However, businesses can take advantage legally by consulting a tax advisor.

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How Businesses Can Benefit from Augusta Rule

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Business owners can rent their residential property to the business for up to 14 days a year. They earn double tax benefits as a business and as a homeowner.

By Augusta Rule, they can earn the rent, and there is no need to pay taxes on it and report the income. Secondly, the business can deduct the rent as a business expense. Thus, it can reduce the tax bill with the help of the rule.

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Suppose you are a business owner, and you own a vacation property in Florida. You can rent your property to businesses up to 14 days a year. You can do that multiple times as long as the total rental period does not exceed the limit.

If the rent per day is $500, you can earn $7,000 as a homeowner. Secondly, this $7,000 can be deducted as a business expense. Thus, it's a win-win for both business and the homeowner.

Any shareholder, co-founder, or employee can be the homeowner to take benefit from the Augusta Rule and reduce the tax bill.

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When to Rent Your Property to Business

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You might think it is a loophole, and you could end up exploiting this benefit. However, it is a tax provision, and you can legally take benefits.

Businesses often need a place for shareholder meetings, board meetings, monthly meetings, etc. Instead of renting a third-party property, business owners use their own properties. It will save money, reduce tax bills, and earn a tax-free income.

Similarly, if business owners own a vacation house, they can invite their employees for a retreat. It could be several days to a week. The employees will be able to relax and enjoy their time, and the business will be able to save some money on rentals. By renting the owner's property, the tax can be reduced, and the rental income will be a benefit for the owner.

There can be tons of use cases. Business owners can use their properties for parties, meetings, conferences, coaching, or any other business activity.

However, keeping a record of the meetings, schedules, minutes, invoices, expenses, and other things is necessary. Invoice the business to the business. For each rental period, you should have a written rental agreement.

One property can be used for up to 14 days a year. If there are multiple properties of business owners, it will be more beneficial.

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What Should Be the Rent?

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There is no upper and lower limit on the rent property owners can receive to be eligible for the Augusta Rule. However, it should be fair and according to the market value.

Research the market and understand what hotels, ballrooms, and others are charging for their space. Evaluate the area of your property and rooms, and then come up with a fair and honest value.

The rent can be higher for special events, such as sports events, Christmas, the holiday season, etc. It goes according to the market demand.

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Consult A Tax Professional

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Businesses can benefit from the Augusta Rule and reduce their tax bills. Owners can use their property and earn a tax-free income on a personal level. However, it should be done the right way. You can't use the rule specifically for personal gains and exploit the provision. You can also be penalized if the IRS finds out about personal gains.

Consulting a tax professional is essential to evaluate the eligibility and reduce tax bills the right way. FCF Consulting Partners offers strategic tax planning, including how to use the Augusta rule efficiently. We can create custom plans for businesses and implement tax strategies for maximum benefits.

Book a free 30-minute tax strategy session to implement the Augusta Rule and reduce tax bills.

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