The Augusta Rule
Amen Corner at Augusta National Golf Club
A Tax Deduction Opportunity for Practice Owners with a Home
Technically, the rules surrounding this deduction are found in IRC §280A(g), but it is commonly referred to as the Augusta Rule, as many of the home owners in Augusta, Georgia rent out their homes during the annual Master’s Golf Tournament for huge fees and don’t have to pay any taxes on that rental income. Here is how it works in general:
Rent your home (primary, not vacation) for less than 15 days per year
Take no tax deductions related to those rental days
Pay no taxes on the rental income derived from those rental days
Sounds simple enough, but you likely don’t live near Augusta or someplace where people would pay you $20,000/week to rent your home. But don’t despair, here is how you can make the Augusta Rule work for you and your practice:
Ensure that your practice is a separate legal entity, as you can’t rent your home back to yourself. The easiest way to ensure separation is by electing to be an S-corp. The key to avoiding related party rules is to create a clear division between yourself and the practice.
Establish a fair rental price for using your home for staff meetings by contacting local hotels for meeting room rates. Use common sense in determining a legitimate comparison rate.
Sign a rental contract between your practice and yourself for use of the home and invoice the practice for each rental day. Pay yourself from the practice account just like you would any other vendor.
Document, Document, Document the meeting to prove that it actually happened. Ensure it is on the practice calendar, have a team member create an agenda and take minutes as well as take photos.
Depending upon the number of staff meetings you want to have in your home and the legitimate rental rate in your area, you can likely transfer between $4,000 to $20,000 from your practice to yourself tax-free.
But don’t ignore some of the downsides:
These meetings really need to take place, so if your home is not conveniently located or not set up for your full staff, it could be more work than it is worth.
Your staff may feel underpaid if your home is in a nice neighborhood or well decorated. We had one client hold a in-home staff meeting on Friday, then get three raise requests on Monday.
While this is a legitimate deduction, abuse is on the IRS radar. Don’t be like these two physicians who got greedy and ended up paying back taxes plus penalties and interest for not documenting meetings and using an aggressive rental rate.
If you have questions on your specific situation, please schedule a consultation with JNG Advisors today to determine whether it’s possible to rent your personal residence to your business in an effort to lower your tax burden.