The IRS Section 280A – Tax Free Business Rental of Your Home
There are very few deductible business expenses that are not going to be reportable income for the recipient of the expense money. This is even more true for when you take money out of the business for your personal use. It becomes reportable income on your personal tax return, except for IRS Section 280A(g), also called the “Augusta” Ruleiii. It got its name from the golf tournament in Augusta, GA when personal residences are rented out for business use.
Before you get too excited, this great tax break is not available to Sole Proprietorships or Single Member LLCs. Consult a tax advisor or accountant to be sure, but most other LLCs, Partnerships, and corporate structures can take advantage of it. It works for both the business and the business owner/shareholder’s personal taxes by allowing the business to deduct the expense of renting the owner’s personal residence for business purposes. The business/homeowner does not have to report this income on their personal return, tax free money!
Common Use Example
If your business on occasion rents conference halls, meeting halls, hotel rooms, catering hall, or other centers for business meetings or gatherings, Section 280A can be a terrific way to take the deduction and pass the tax savings on to one of the business owners by renting their residence for the business purpose.
An example could be a monthly business meeting of partners or business management for any legitimate business purpose. Instead of renting a commercial hall or meeting place, the business can rent the home of one of the owners or shareholders. This can be for anything from staff meetings to business multi-day retreats.
Requirements for Compliance
The steps and rules for making sure that your use will qualify include:
- Does your use of the home qualify as an ordinary and necessary business expense?
- Document in writing the purpose of the meeting or business purpose. For corporate entities, there should be minutes recorded with the purpose and conduct of the business meeting or event. This would include the agenda, meeting notes, and attendees.
- You must determine the fair rental amount for the home or area in the home. You can do this by checking the local meeting hall or hotel room rates and recording them in the meeting notes to document for the IRS that the rent is not excessive.
- The paper trail and documentation must include an invoice for the rental. It would clearly set out the rental amount and use of the home for a legitimate business purpose.
- The business should pay with a check for a paper trail. If more than $600 is paid in the tax year, it must be reported on a Form 1099 for the homeowners’ tax return. WAIT, don’t get excited, as this will get reversed!
- The homeowner(s) would report this income on a Schedule E. Then, under the line item for “other deductions,” you would enter the amount reported as income to be offset by a deduction. Describe this deduction as “non-taxable income under IRS Code Section 280A(g).” This negates the income, and the rent is not taxed.
Consult with your accountant or tax advisor to make sure your use qualifies and that you document it properly. Then enjoy your tax-free income.
i Topic No. 415 Renting Residential and Vacation Property – IRS.gov
ii Internal Revenue Bulletin: 2013-6 – IRS.gov