If you’re like most home and business owners, you likely don’t concern yourself with the intricacies of tax codes. However, that might be a mistake. Certain tax codes, like the Augusta Rule, can provide exemptions on taxable rental income.
But exactly what is the Augusta Rule for taxes? And how do you take advantage of it as a business? Those interested in answer to these questions are in the right place.
In this guide, we’ll provide you with everything you need to know about this tax code. That way, you can decide if it’s the right decision for you.
The Augusta Rule: What Is It?
The Augusta Rule goes by many names. While it’s officially known as Section 280A(g), it’s also called the Masters exception and the Augusta Exemption. This IRS exemption allows homeowners to exclude up to two weeks of rental income from their taxable income.
This is true regardless of what tax bracket they fall under. So how did this strange exception come into existence? It started with the Masters golf tournament held in Augusta each year. This tournament, which lasts around two weeks, brings in an influx of visitors.
Now many homeowners want to rent their properties to visitors without turning their homes into the rental business.
Through lobbying efforts, they were able to add Section 280A(g) to the tax code. Luckily, these days the Augusta Rule doesn’t just apply in Georgia. It’s now available to all homeowners throughout the United States.
How Does the Augusta Rule Work?
The first part of the Augusta Rule is that the dwelling unit in question needs to be your residence. It doesn’t matter if it’s an apartment or mobile home; as long as you use it as a residence, it works.
The rule also applies to your primary, secondary, and vacation properties. Also, the fourteen-day limit doesn’t need to be consecutive. The wedding season is really busy where you live. If so, you can rent it out whenever there’s a big wedding weekend.
As long as you don’t go over fourteen days, you’re fine. Any expenses you incur related to the rental cannot be deducted. Lastly, the rental price needs to be fair. As long as your prices are similar to the current demands of the market, then you’re good to go.
Related: What Are Tax Incentives? Beginner’s Guide for 2023
Augusta Rule Requirements
As we mentioned, there aren’t any income requirements for the Augusta Rule. That being said, there are some basic things you’ll need to follow if you want the rule to hold up on your taxes. These requirements include:
- Have a written rental agreement between parties.
- Have documentation that supports the rental price at market value
- If you have a meeting at the property, take notes and minutes
- The business entity using the house must be either a partnership, C corporation, or S corporation — Schedule C cannot use the rule unless they’re a Single Member LLC
Did you make the requirements for the Augusta Rule? Reach out to a tax consulting service like TaxRobot, and we’ll help you decide if it’s the right call for your needs.
Related: What is Tax Basis? Definition and Setup
How Can Businesses Take Advantage of the Augusta Rule?
The Augusta Rule sounds all well and good for homeowners. But exactly how does it benefit businesses? The key is how you use it. If done correctly, you can get multiple benefits by renting your house to your business. What benefits?
How about both a tax deduction and income that you don’t need to include on your AGI? Here’s how it might work. Let’s say you’re a business owner with a vacation rental property.
Your business could rent your own home for a three-day weekend retreat where you hone strategies or develop new products. In this example, you get to double dip. Your business can deduct the rental price as a legitimate business expense.
And you don’t need to report the income you made because of the Augusta Rule. But what if you don’t have a vacation home? Consider some of the other applications that homes can be used for:
- Production spaces
- Online coaching mastermind events
- Shareholder meeting
- Employee meetings
- Development spaces
Just make sure you keep detailed records that your business paid market value for the rental prices.
Look for Tax Planning Software That Includes the Augusta Rule
The next time you consult with your CPA, consider bringing up the Augusta Rule. Ask for their recommendation on whether or not it’s a good idea. Many tax professionals have access to software that allows you to estimate how much money you would save with the Augusta Rule.
That way, you can see whether or not it’s the right call for your business’s needs. If you need some suggestions, these are all great recommendations for tax preparation services that can help you with this type of deduction.
Want to save even more money on your taxes? Click here to learn more about R&D tax credit software we’ve developed that can reduce the taxable income you owe.
The Importance of Tax-Saving Opportunities
The Augusta Rule might not be for everyone, but it’s essential to take advantage of every tax-saving opportunity that comes your way. Why? Because the reality is that you’re probably overpaying on your taxes.
One study found that taxpayers overpay their taxes by more than $800 million each year. This statistic demonstrates the importance of taking advantage of any savings, regardless of the form.
So, if you need clarification on whether the Augusta Rule is right for you, consult with a tax professional to get more information. Not reaching out to outside help is one of the most common mistakes a small business can make.