The Augusta Rule is a lesser-known tax strategy despite its relatively simple structure and effective results. The rule originated in the 1970s when residents of Augusta sought to prevent tax issues from renting out their homes during the Masters Golf Tournament. The Augusta Rule allows entities that are taxed as S-Corporations and C-Corporations to generate deductible expenses for their Corporate meetings.
The rule stems from Section 280(A)(g) of the Internal Revenue Code which states: “Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year then:
- No deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed; and
- The income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under Section 61.” 26 U.S.C.A. § 280A(g)
This allows an individual business owner to rent out his or her home to a separate business for 14 days of the year. The business will then pay rent to the individual for the use of the home. The business owner receives income which does not have to be reported as gross income on his or her tax return and the business receives a deduction in its taxable income which falls under Business deduction of expense reimbursements.
Few requirements must be met to qualify your meeting as a valid Augusta Rule Meeting. First, the company must be an S-Corp, C-Corp, or partnership taxed as an S-Corp or C-Corp. Second, the property must be a residence, but it does not necessarily have to be a primary residence. Third, rent price must be calculated at Fair Market Value, which is crucial for the IRS’s determination of deductible income. Fair Market Value must be determined through appropriate market comparisons, considering geographic area and size. Fourth, meeting minutes must be recorded detailing the date and time, attendants, what was discussed, the outcome of the meeting, and what the rental rate was. In the event of an audit, detailed meeting minutes provide concrete evidence of a legitimate business meeting. Lastly, the business owner must ensure that the home is not rented for more than 14 days. Once the home is rented for a 15th day, the tax benefits for the individual homeowner are lost.
