A Sweet Tax Trick for Small Biz Owners: Meet the Augusta Rule!
Company Meeting Space Rental
(a.k.a. Augusta Rule)
How it Works
Section 280(A) of the Internal Revenue Code grants an individual an ability to rent their home for less than 15 days per year without reporting that income or paying tax on it, so long as certain requirements are met. Business owners can use this to their advantage by holding legitimate business meetings in their home for a fee. When done right, the business gains a legitimate tax deduction while the homeowner (usually the business owner) gains the money tax free. Schedule a time with us so we can help you identify how to use these meetings. Legitimate meetings could include board meetings, company parties, employee meetings or other types of meetings that are relatively infrequent and serve a legitimate business purpose.
To meet the requirements of Section 280(a), the following must exist:
- 1) There is a legitimate business reason for the rental
- 2) The owner charges the business a reasonable rate for the rental
- 3) The property is a qualifying residence
- 4) Proper documentation is kept
Legitimate Business Reason
Legitimate business meetings could include (but are not limited to):
- 1) Board meetings
- 2) Company parties
- 3) Upper management meetings
- 4) Financial, legal, marketing, or other meetings
- 5) Business growth meetings
When planning appropriate meetings, it is best to avoid using those that are frequent, routine meetings, such as weekly staff meetings, daily partner discussions, or other meetings that typically occur more frequently than once a month.
The general rule of thumb is to charge a rate similar to what you would pay a third party to rent a space for your meetings. You could, for example, get quotes from event venues, hotels, or other locations that offer space in your area.
At Tax Hive, we frequently refer to a website called Peerspace (found at www.peerspace.com) to find reasonable rates or schedule a time with us and we can help you figure this out. We will search for board rooms within a state. We will then determine a reasonable middle ground (which we have seen typically falls in the range of ($175-$275 per hour), and pull supporting documentation from the website for these rates. We like to recommend holding meetings that can justify a day rental so you can reasonably justify $1600 per meeting.
There are two requirements for a property to fit the rules of a qualifying residence:
- 1) Rent a dwelling that also qualifies as one of your residences
- 2) The property is not rented out for more than 14 days per year
A dwelling unit, according to the code, includes a house, apartment, condominium, boat, mobile home, and similar property. It is proposed a residence should include basic living accommodations, including a sleeping space, a toilet, and cooking facilities.
To be a residence we like to recommend you use a property in which you live over 140 days because you have to live in the home for the greater of:
- 1) 14 days, or
- 2) 10% of the days you rent the unit
Remember the 14 day rule has been argued to apply on a rolling 12 month basis, which means you can’t go over the 14 days in any 12 month period. For this reason we at Tax Hive like to recommend one meeting per month. It keeps you safely below the 14 day limit.
We strongly recommend the following documents as part of your audit defense in using this strategy. Schedule a time to speak with us and we can help you understand how to use these documents:
- 1) A rental agreement for the use of the home (we recommend a new one for each use, though it can be a newly signed copy of previous agreements where dates and signatures are all you update).
- 2) Documentation of the meeting that took place (i.e. board meeting minutes or event pictures). Meeting minutes, if used, should include who was there, what was discussed, and the date the meeting was held. Pictures, if used, should include timestamps to support the claim.
- 3) An invoice sent from you to the company clarifying the date of the meeting and the rate charged.
- 4) Evidence the invoice was paid
An Example of the Augusta Rule
Client A owns Corporation B, which files as a Subchapter S Corporation. As a Subchapter S Corporation, Corporation B is required to hold board meetings. Client A chooses Spouse C as a member of the board, and they elect to have monthly board meetings.
Client A does some research and determines an average range of $175-$275 per hour is normal for meeting spaces they find. Client A decides to rent the home to the business at $1600 per day (8 hours times $200 per hour), choosing not to be aggressive in rates. Over 12 days at $1600 per day, Client A charges Corporation B $19,200 per year for meetings.
Because Client A chooses not to rent the personal residence for any other reason, Client A stays below the 14 day limit and is allowed to exclude the rental income from their income. Corporation B pays the money to Client A, allowing Corporation B to claim a legitimate expense on their books.
SUPPORTING TAX LAW
- 1) IRC Section 280A(g)
- 2) IRC Section 280A(f)(1)(A)
- 3) Proposed IRC Section 1.280A-1(c)(1)
- 4) IRC Section 280A(d)(1)
The Augusta rule is a great strategy to help you keep more money in your business. Schedule a time with us now so we can help you with this strategy and other money-saving tax deductions.