There are some tax deductions that most self-employed physicians are aware of, such as home office deductions and solo401ks, but there are some others that are potentially large deductions that are lesser known, such as the QBI deduction and defined benefit plans. One that is often overlooked but that many physicians who use their homes for business purposes may not know about but qualify for is the Augusta rule. This rule allows you to rent your home to your business for a write off on your business tax return that is not taxed as income on your personal return. As with most unique tax deductions, there are nuances to make sure that you meet the criteria, so you’ll want to ensure that you are both legally using it as well as documenting it if you elect to pursue it. Below, we’ll cover what you need to know about the Augusta rule.
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What is the Augusta rule, and what is the history behind it?
The Augusta rule is a niche part of the tax code that allows people to rent their personal home federal income tax free for 14 days or less in a calendar year. It is codified in Section 280A(g) of the Internal Revenue Code.
Its name recognizes homeowners at the Augusta National Golf Club who were renting out their homes occasionally for the annual Masters Tournament but were not really running a short term rental business (but this can be used for any personal home).
The interesting part about this for business owners is that they can actually rent their personal home to their business and claim a deduction for that rent on their business tax return, as long as the appropriate criteria are met and appropriate procedures are followed.
Essentially, because your business can write off the rental expense, it helps to reduce your business’s taxable income, which can save you money on taxes, while simultaneously not paying personal federal income tax.
This is perfectly legal (i.e. not tax evasion) and not a “tax loophole,” as it recognizes businesses often need space for operations and the most practical (and cheapest!) venue may be the small business owners’ personal property. As an added benefit, you won’t have the expense of renting another venue.
What purposes can you rent your personal home out to your business for?
As above, businesses may require space for many reasons, including shareholder meetings, company retreats, business meetings, educational events for employees or clients, and more. Note that you should avoid renting it for entertainment purposes.
What conditions must be met to qualify for the Augusta rule, AKA Section 280A(g), deduction when you rent to your business?
You must have a standalone business entity. This means you can not be a sole proprietorship.
You must have a legitimate business purpose to rent your home to your business, as above.
It must be your personal primary residence, not just a property you own or a second home/vacation home.
You can’t rent your house out for more than 14 days per calendar year.
There are some nuances about if your business’ primary place of business is your home, which you should talk to your CPA about.
Expenses related to the rental (such as cleaning) can not be deducted on the personal side as you are saying this is a personal home, not a rental business.
How much of a deduction can you take under the Augusta rule, aka under Section 280A(g)?
This will be by market value on the space that you have rented out. You can imagine an inappropriate deduction where someone charges $50,000 a day to take a huge tax deduction to offset the business income, and they would (rightfully) be scrutinized by the IRS.
Therefore, it’s a good idea to research and document venues in the area for similar meeting or event spaces/sizes so that you can justify the amount that you charge the business in rent. This will help you to pass the sniff test if it is examined more closely, and will of course give you the guidance you need to set pricing and determine how much of a deduction you’re going to take.
What are other general guidelines to follow to prevent issues if audited?
Document plans to have the meetings or events, why you’re having them, and consider having a signed rental or lease agreement as applicable. If possible, take meeting minutes during the actual event or meeting.
Ideally, have the meetings be with employees or proven clients instead of potential clients. This way, you’ll be able to verify that you had an event with true business contacts.
Ensure that your pricing is reasonable by charging an amount that can be judged as market value.
Invoice your business for the rental expense, and have the business pay the expense. The invoice should come from you personally and be paid by the business account, ideally in a traceable form such as a check (store relevant records)
Make sure you report the income on your personal taxes and the expense on your business taxes. You may also need a 1099-MISC filed. Talk to your accountant to make sure that you document it correctly.
Keep all of your documentation in a safe place in case you need it in the future.
What else do I need to know from a tax perspective?
We are not accountants, and these rules and laws can vary from a state and local perspective as well. We recommend that you always talk to your accountant before implementing fancier tax strategies such as this one to ensure all your i’s are dotted and t’s are crossed. Also check the IRS.gov website for any applicable information.
As alluded to in the previous section, you may have to file a 1099-MISC from the business to you personally if the business pays more than $600. As long as you followed the rules, this will be zeroed out on your taxes, but the paperwork will need to be there.
Conclusion
In the right circumstances, using the Augusta rule, or section 280A(g) of the tax code, renting your home to your business can result in substantial overall tax savings for you as a business owner, as it allows you a tax deduction on the business side without the accompanying federal income tax on the personal side. Talk to your accountant about whether or not this deduction makes sense for you. Sometimes, the lemon won’t be worth the squeeze, but depending on the numbers and your business’ needs, it could be a legal and tax savvy way to take advantage of a deduction available to you as a business owner and homeowner.
Additional tax resources for self-employed physicians
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