Rather than using fine print at the bottom of this post, I will pre-qualify everything I am about to say with the disclaimer that I am not, nor have I ever been, a CPA or tax professional. The implementation of any tax strategy should be discussed with your professional tax advisor.
The Augusta rule is a fairly niche but straightforward tax strategy that can provide a business owner with tax-free income. For the sake of time, I'll skip the backstory behind the name and just tell you that it's named after the city that the Master's golf tournament is held.
Let's start by answering a simple question: who does this strategy work for?
A business owner who...
Owns a legitimate business taxed as an S-Corp, C-Corp, Partnership, or an LLC taxed as any of those entities.
Owns a home, second home, vacation home, or rental property that can host a corporate event, employee retreat, board meeting, etc.
Actually hosts the above event(s) for real business purposes.
The Augusta Rule is a nickname for IRS Code Section 280A that allows homeowners to rent out their property (either primary, vacation, rental, etc.) for up to 14 days without having to report rental income on their tax returns. Notice how we aren't talking about business owners just yet--anyone can rent out their property for 14 days and receive tax-free income.
Using the above criteria, let's walk through a hypothetical scenario that outlines the tax benefits exclusive to business owners:
Jordan owns a farm equipment manufacturing company. The company is an S-corporation with 150 employees and seven members of the management team. Every quarter they hold an offsite management meeting in Florida as well as an annual, week-long management retreat. In the past, all of the meetings were hosted at the Ritz-Carlton in Naples--four quarterly meetings (two days each) and the six-day management retreat.
Jordan recently purchased a beautiful home in Naples, FL that he is using as a vacation home for his family. It's got more than enough room to host a crowd and his CPA recommends utilizing the Augusta Rule to provide some tax-free income. Rather than host the meetings at the Ritz, Jordan decides to hold all of the meetings at his home.
On the open market his vacation home rents for $3500/night. The business rents the home for 14 nights from Jordan and takes the applicable business deduction. Jordan in turn receives $49,000 in rental income from the business. The normal deductions for food, travel, etc. still apply. Because he only rented his home for 14 nights, Jordan doesn't have to report any rental income.
Assuming he is in a 37% tax bracket (remember S-corps are pass-through entities and income is taxed at the owner's rate) that $49,000 would have a tax liability of over $18,000 if held as profit within the business. By essentially transferring it from the business to the owner in the form of tax-free rental income, Jordan is able to keep that tax liability in his pocket.
As with any strategy, there are nuances and technicalities to be aware of. For example, the situation is more complex if you are already taking a home office deduction. You're also on the hook for all the rental income if you end up renting the place out for 15 days--just one day more than the allowed amount. And make sure you're using real invoices and receipts between two separate entities! It may not be a bad idea to include the rental income on your Schedule E with a footnote explaining the non-taxable income rather than have the IRS come asking questions.
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