How to Implement the Augusta Rule for Your Business

business deduction business expenses business taxes deductions tax deduction tax planning tax savings tax strategy Sep 09, 2022

One of the most popular tax strategies for small business owners is called the Augusta Rule. This rule allows you to rent your primary residence out (assuming you own the home, not rent) for up to 14 days per year tax-free. Business owners utilize this strategy in order to rent their home out to their business for board meetings, trainings, interviews, and other uses. In order to take advantage of this strategy, documentation is everything.

If you haven't listened to the podcast episode dedicated to this tax strategy, take a listen here.

To successfully implement this or any tax strategy for your business, recordkeeping is the most important thing. Tax savings resulting from completely legal strategies can be disallowed if you cannot substantiate the strategy. In the case of the Augusta Rule, you would be expected to prove that the rent that you paid from your business to you personally was in fact rent and was not a distribution subject to income tax.

How do we do that? Here are three items you want to make sure you have on file:

(1) A rental agreement - You will need to have an agreement that outlines the terms of the rental days and rates. This agreement is simply between you and your business, so you can adjust terms as needed to accommodate you desired pay schedule. Remember that your rental days (up to 14 per year) do not need to be consecutive, so your rental agreement must cover all of the days and must be updated for any new dates or for the following year.

(2) Meeting minutes - If you use the Augusta Rule for board meetings hosted within your home, you will want to keep minutes of meetings and records of any decisions made or topics discussed. Video footage from a training, event or shoot are also helpful artifacts. Think about proof you will need in order to show what took place.

(3) Comparable rental rates - Because you get to rent your home at the market rate of rent for your location and the time of year for which it is used, you will want to grab snapshots of similarly sized spaces and their rates. Because prices vary a lot during the year, especially in seasonal locations, you want to capture the rates you are seeing at the time to preserve the proof.

Organized documentation helps and audit go much smoother and allows you to take advantage of strategies with more confidence.