Christmas Tree and Presents

An Unexpected Christmas Present to Business Owners from the IRS

The IRS as Santa Claus?  A gift under the tree that every business owner should want to open!  Often the IRS makes new tax rules in reaction to a natural disaster, such as extending the filing deadline for Kentuckians after devastating tornadoes struck.

Other rules are put in place to deal with changing financial dynamics, as with crypto currency.  They have rushed to make tax rules for this new form of currency.  Those new rules inadvertently gave crypto owners an advantage, in that they could harvest losses without a “wash rule” by re-buying the same “coin” two seconds after selling it, but still taking the loss on their taxes.  Over time they tend to be good at detecting these “errors” that often come along with unintended consequences and plugging up the “loopholes” one by one.

One such loophole that doesn’t seem to be on the IRS radar screen yet is a rule created by the personal house rental pandemonium that developed after the dot-com bubble burst.  Vrbo, Airbnb and other services have allowed anyone to be a landlord for just a weekend or a few weeks a year.  The IRS decided that requiring every person who had even a one day rental to file a schedule E, with all the additional audit burden that would be put on the service, would not be worth the small additional tax revenues, so they passed the “Augusta Rule.”

The Augusta Rule, Section 280A(g) states in part:

“…if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then… the income derived from such use for the taxable year shall not be included in gross income…”

In layman’s terms, this means short-term rentals of personal residences are not taxable.

Of course, like with all tax laws, there is some fine print worth noting:

• To qualify for the exemption, the taxpayer must be renting out a dwelling unit that they use as a personal residence. This means that renting out a house, apartment, condo, mobile home, boat or similar property may qualify for the exclusion as long as the taxpayer uses that dwelling unit as a residence.

• The Augusta Rule IRS exemption applies to the owner’s primary homes, secondary homes and vacation homes.

• Expenses related to the rental of these properties are not deductible.

• The 14-day restriction is cumulative and does not need to be consecutive.  For example, if you live close to a popular wedding venue, you might want to rent your home to guests of different weddings throughout the summer and fall. As long as you do not exceed the 14 day rent rule in a single tax year, you can qualify.

• The rental price must be reasonable for that location on that date.

Business owners are often renting hotels and other venues for company training or client events.  Now because of the unintended consequences of this new “loophole” they are able to rent their own venue to themselves instead.

Example: Dan usually runs three employee focus trainings a year.  He would rent a local event center for 3 days at $800 per day and pay $2,500 to cover hotel rooms for “fly in” employees.

$800 x 3 days = $2,400, plus $2,500 comes to $4,900 spent.  Three times per year totals just shy of $1,5000 as a company expense.

With the new Augusta Rule and because he has a beautiful second home on a lake, Dan can rent his own home to his own company for those events.  His employees stay in the guest house and bed rooms and the trainings are held on the big deck overlooking the lake.  Dan’s company still writes a check for $15,000, but now it’s a check payable to Dan, who cashes the check and puts the money in his own pocket, 100% tax free!

If you own a company and have a suitable “residence” and you’re not renting from yourself, perhaps it’s time to review the “Augusta Rule” with your tax planner?

Have questions about this topic?