Tax-Free Income from 14-Day Augusta Rule for S Corporation Owners
IRC Section 280A(g), also known as the Augusta rule, states:1 “Notwithstanding any other provision of this section or section 183, 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—
- No deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and
- The income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.”
Example: Fred rents his home at $3,000 a day for 14 days. Under the Augusta rule, he qualiﬁes for no rental deductions. But he also excludes all the rent, the full $42,000 ($3,000 x 14) from his income.
The Sinopoli Case
Dr. Sinopoli, Dr. Siragusa, and Mr. Hurring each owned one-third of their S corporation.
During the three years before the court, the S corporation paid rent under the Augusta rule totaling $290,900. The rental was roughly $2,693 per use, 36 uses a year, over three years.
The S corporation held three meetings a month, one in each of the homes of the individuals party to this case—and the participants in each of the meetings were, with some exceptions, the three individuals.
For the most part, the three parties in this case reported the rental income and then deducted it under Section 280A(g) for a net income of zero.
Although the case does not mention why the three parties did this, we suspect that each of the three individuals received a Form 1099 for the income (as they should have) and had to exclude it using Section 280A(g) as they should have.
Dr. Sinopoli researched rental rates for meeting spaces where the three parties lived and determined that meeting spaces rented at a rate of $1.83 per square foot, which the S corporation used to calculate rent for the residences’ common areas used for the meetings.
The court noted that Dr. Sinopoli did not get an appraisal.
The revenue agent assigned to examine the S corporation and three parties researched the local rental rates for meeting space and determined that locally available meeting space accommodating 500 to 1,200 people rented for approximately $500 for a full or half day.
Is the fair rent $2,693 per meeting or $500?
We don’t know what proof either Dr. Sinopoli or the revenue agent had, but we do know that generally proof wins. Here, the court ruled with the IRS and set the rent at $500 per meeting.
Number of Meetings
The next thorny issue for the three parties was the number of meetings. The court noted that the three parties failed to produce any credible evidence of what business was conducted at such meetings, and their testimony was vague and unconvincing regarding the meetings.
The three parties produced no minutes, notes, calendar entries, or agendas for the meetings. When they testiﬁed, the court found their testimony inconsistent and not credible.
The court ruled that 33 meetings occurred. At $500 a meeting, that’s a deduction of $16,500 compared with the claimed deduction of $290,900.2
- If you are going to claim tax-free income by renting your personal home to your S or C corporation for less than 15 days, make sure you have documentation proving that the rent received was a fair rent; and
- Proving what took place at the meetings (minutes, agenda, perhaps a voice recording of the event, that you could, if necessary, get transcribed for very little money).
In light of the intricate tax regulations and rules discussed in this article, it is clear that navigating the complexities of renting your personal dwelling to a corporation, especially in the context of S corporations, can be a challenging task.
To ensure that you are in compliance with tax laws, receive fair rental rates, and are well-prepared to substantiate your claims, it’s advisable to seek professional guidance.
To navigate these complexities with confidence and ensure your financial well-being, reach out to us at Morris + D’Angelo today to discover how our expertise can be your ticket to financial success and wealth preservation! Your peace of mind is just a click away.
Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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