Question about my son using the Augusta rule

[SecondCor521]

I came across a suggestion from a reasonably reliable source the other day which seems plausible. But I'm not sure if it is truly OK mainly because it seems too good to be true.

The suggestion is for sole proprietors to rent their personal home to their sole proprietor business at fair market value for business events. The source asserted that if one does this for less than 15 days per tax year, the taxpayer can deduct the rental costs as an expense on schedule C, but not report it as personal income because of the Augusta rule.

I happen to have a son who owns his own legitimate sole proprietor business and also owns his home. Can he use this rule to his advantage?

Batsignal to @cathy63 and @pb4uski.

 

[pb4uski]

Yes.

 

[Sunset]

Interesting idea I didn't know about as I don't play golf.

This website says no for sole proprietorships.

https://www.ustaxaid.com/blog/what-they-dont-tell-you-about-the-augusta-rule-that-can-cost-you-big-time/

 

[cathy63]

It's a bit risky. See here: A Tax-Free Way to Rent Your Home to Your Business (If You Follow the Rules)

A word of caution for sole proprietors: This strategy is generally not available if you operate as a sole proprietorship (filing a Schedule C). The law sees you and your business as one and the same, so you cannot legally "rent" to yourself. The business must be a separate legal entity.

At the very least you should be able to show you were conducting actual business in the home during the rental period.

 

[SecondCor521]

It occurred to me just now I could ask Grok. Not that AIs are good at tax law, but it did seem to think that this option is not legitimate for him because his business structure is a sole prop and the transaction would lack economic substance.

Additional thoughts welcome.

 

[SecondCor521]

At the very least you should be able to show you were conducting actual business in the home during the rental period.

Right. I was imagining he could host business events at his house. His business is car related, and he often hosts car meets for his customers. Right now he does those at his shop location, but he could do them at his house.

Renting out a condo for a couple hours a month though is probably not worth the audit risk.

 

[Sunset]

I can see the benefit of the business being able to deduct the rental expense. But the homeowner can't deduct expenses and doesn't declare income.

Topic no. 415, Renting residential and vacation property | Internal Revenue Service

Topic No. 415 Renting Residential and Vacation Property

www.irs.gov

But the IRS site says:
"

Minimal rental use​

There's a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don't report any of the rental income and don't deduct any expenses as rental expenses."

 

[pb4uski]

Yes.

I wasn't aware that a Schedule C could not deduct the rent paid but I can see the logic of it since it is the same entity/return. Is his "sole proprietorship" a Scheudle C or something different?

 

[Sunset]

I think the IRS view of "..don't deduct any expenses as rental expenses." applies to the person renting out the house , so can't deduct 2/52 weeks of property tax, electricity, water, insurance, etc. Which makes sense since not claiming the income gained.

Seems to me the renting entity could deduct the expense of renting as long as they are a "separate" entity (my own opinion).

 

[Texas Proud]

I am wondering why they would want to do this... at least the OPs son...

He has a shop where he conducts business... why would he want to have people come over to his house? What actual benefit would it bring to him?

I think not much...

 

[SecondCor521]

I wasn't aware that a Schedule C could not deduct the rent paid but I can see the logic of it since it is the same entity/return. Is his "sole proprietorship" a Scheudle C or something different?

Currently a Schedule C and probably will be for the foreseeable future.

 

[SecondCor521]

I am wondering why they would want to do this... at least the OPs son...

He has a shop where he conducts business... why would he want to have people come over to his house? What actual benefit would it bring to him?

I think not much...

Are you asking from a business perspective or a tax perspective?

 

[racy]

It's a bit risky. See here: A Tax-Free Way to Rent Your Home to Your Business (If You Follow the Rules)



At the very least you should be able to show you were conducting actual business in the home during the rental period.

That's what I was wondering: Is the intention to dodge taxes or is it a legitimate business need. Maybe legal but moral?

 

[SecondCor521]

That's what I was wondering: Is the intention to dodge taxes or is it a legitimate business need. Maybe legal but moral?

My son conducts his business both legally and ethically in all major respects including taxes.

At this point, based on the feedback here and my further research, I will not be sharing or recommending he use the Augusta rule in the way that was suggested.

The intention would have been to be aware of tax law and conduct business in a tax aware way. If there were a business event he could host at his home instead of his shop and it is ordinary and reasonable to do so and if there were an associated tax benefit generally considered legitimate, then I would have shared the idea with him.

Analogous examples would be waiting over a year to sell stock to be able to use LTCG rates, or putting money into retirement accounts rather than taxable, or paying the first $4K of college expenses out of pocket to take advantage of AOTC.

We stay away from dodgy things like syndicated conservation easements, claiming fuel tax credits incorrectly, and the like.

We also stay away from obviously illegal and immoral tax practices like not reporting income or taking personal expenses as business deductions.

 

[pb4uski]

We may use the Augusta rule for the summer home that my 4 sisters and I share through an LLC. We each have rotating 2-week blocks of time scheduled from late-June to mid-September.

We don't currently rent it to others but I guess that we could rent it to outsiders/friends of the family for up to 14 days a year and the LLC would not have to claim that rent as income in the 1065, right?

 

[pb4uski]

That's what I was wondering: Is the intention to dodge taxes or is it a legitimate business need. Maybe legal but moral?

It could be both. Many successful busines owners also have nice residential homes that woud be a nice venue for a company party or meeting or retreat, etc, all of which would be a legitimate business need and in lieu of having the same party, meeting or retreat at a nearby conference center.

If the business is a C-corp or Sub-S or partnership, then it is a win-win. The company gets a nice facility for the meeting and pays the same or similiar to what they would pay a conference center and the property owners get cash for the rental but don't have to claim it as income.

 

[cathy63]

We may use the Augusta rule for the summer home that my 4 sisters and I share through an LLC. We each have rotating 2-week blocks of time scheduled from late-June to mid-September.

We don't currently rent it to others but I guess that we could rent it to outsiders/friends of the family for up to 14 days a year and the LLC would not have to claim that rent as income in the 1065, right?

This is an interesting question. I'm not sure the law (quoted below) applies if the home you rent out is owned by a legal entity that couldn't file a 1040 because the entity filing the tax return has to use it as a residence in order for the income to be excludable.

Can an LLC have a "residence"? The individual members of the LLC can obviously use an asset belonging to the LLC and it might count as a second residence for them, but it seems like a gray area to exclude it from the income of the LLC itself. Though of course since you don't report it anywhere, the IRS will have no way to know about it, so it's very likely you could do it and never be questioned.

(g)Special rule for certain rental use. 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—
(1)
no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and
(2)
the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.

 

[Stormy Kromer]

To me it doesn't pass the smell test.........

 

[pb4uski]

To me it doesn't pass the smell test.........

Well, then I guess that settles it.

 

[pb4uski]

Well, then I guess that settles it.

On second thought Stormy, you don't have a vote. I guess that we'll go with Gemini's advice.

Yes, you can absolutely use the Augusta Rule (IRS Section 280A(g)) for the LLC-owned summer home, even when renting to friends and extended family.
Because your group already uses the home for personal vacations, it qualifies as a "residence." Under this rule, you can rent it for 14 days or less per year and the income is completely tax-free.

 

[Texas Proud]

Are you asking from a business perspective or a tax perspective?

Tax...

If he wants to have people over for business he can easily... no need to do any kind of rental scheme to do it...

 

[SecondCor521]

Tax...

If he wants to have people over for business he can easily... no need to do any kind of rental scheme to do it...

He can. But if he could have received a tax benefit by doing so, then it would have reduced his tax bill.

 

[pb4uski]

This question is way and beyond asking for free advice on any forum. Gather up a few thousand dollars and hire a CPA.

I don't think so. There are several posters here who IMO are well versed in taxes. I'm guessing that cathy is a CPA and a tax practitioner. I'm a retired CPA but not a tax practitioner... my career was in corporate financial reporting.

 

[Stormy Kromer]

To me it doesn't pass the smell test.........

I apologize for what appears to be a smart comment. It is not meant to be. I only wanted to warn the OP to be careful when dealing with IRS rules.

Please leave it to your paid Professionals. You have a legitimate question that I would certainly pursue.

When I mentioned that it didn't pass the smell test I was referring to the OP saying "I heard it from a reasonably reliable source" That's what got my caution flag up. I have heard a lot of wrong advice from reasonably reliable sources. I was just looking out for the OP.

 

[pb4uski]

Well actually, the scheme that the article in OP posed is a legitimate tactic and would be viable if the proprietor/owner was a C corp or S corp or partnership but not in the case that the OP wrote of a sole proprietorship.

Not sure if you are aware, but paid professionals sometimes provide wrong advice too (that's why they buy E&O insurance).