Allen Harris | Mind Your Business: How Golf Can Get You $ 210,000 In Tax Free Income Company
There are not many opportunities for people to receive tax-free income. But, if you are a business owner, you can rent your primary address, a second home, or even your boat and get a tax deduction, as well as non-taxable income.
Augusta, Georgia, hosts the Masters Tournament, one of the Big Four championships in professional golf. About 200,000 people live in Augusta.
During the Masters, approximately 40,000 to 50,000 customers per day visit the city, according to Golf Digest. That’s about the entire move from Pittsfield to Worcester for most of a week.
For owners of Airbnbs and restaurants in Augusta, this is fantastic. But, if you are an ordinary resident, this week can be boring.
The squeaky wheel gets the grease, they say. And born from the squeals of annoyed townspeople was Augusta’s rule. Residents wanted to leave the area during this time and were angry that they had to do so. Lawmakers created a compromise, and that compromise became national in scope.
Augusta’s rule allows homeowners to rent out their homes for up to two weeks per year, federal tax free.
Because the Augusta rule has become national, the rule does not need to be tied to the Masters or any sporting event. And if you’re a business owner, I have a way for you to double the deduction and get preferential tax treatment.
Let’s be clear, this is a legitimate tax savings opportunity, unlike other tactics that I have seen some small business owners use.
For example, small business owners sometimes rent their personal cars and pay for it through the business. With a wink and a nod, they erase the entire rental cost, even though the IRS only allows you to deduct the portion of each rental payment that is intended for business use.
There’s the guy who goes to the Las Vegas conference but stays a few more days on the company’s penny. Or the person who uses the company’s money to pay for their $ 1,500 iPhone and subscription, even if half of it is for personal use. Or the owner who pulls out the company card after dinner at this fancy restaurant and exclaims, “We talked business, haven’t we? “
I can cite a dozen other examples, but you know what I’m talking about.
If you do any of these things, I’m not judging you. I’m just saying it’s not one of those things.
The Augusta rule is a legitimate tax strategy. The Augusta Rule is known to the IRS as Section 280A. Whether or not you own a business, you always report the rental money you collect on Schedule E, which is passive income.
The trick here is that your business can rent the accommodation to you, the individual. The business receives a tax deduction and the owner reports the income tax-free on Form 1040.
Amy owns a cosmetics store and her primary residence is in Great Barrington. She also owns a cabin in Lake George, NY
Amy uses the cabin frequently during the summer, but not so much during the offseason. Seven times a year, she lets some of her employees take the hut for a weekend for team building exercises and a 48h without Zoom to focus on important projects. That’s 14 days of tax savings and productivity.
Each of those seven times, the cosmetics company pays $ 2,000 to Amy’s personal account to rent the cabin. The company sends Amy a Form 1099. Augusta’s Rule says Amy doesn’t have to pay taxes on that $ 14,000 of personal income. At the same time, the company is authorized to offset $ 14,000 in income.
Assuming Amy continues to work and use this strategy for 15 years (until she is ready to retire), that adds up to $ 210,000 in tax-free income.
As long as the property is used for business purposes, the structure doesn’t have to be like this. Your business can also rent out your residence for board meetings, client events, employee training, networking, and more.
Like Joe, you can rent out your primary home for offsite strategic meetings.
Joe lives in Pittsfield and owns several retail stores in the Berkshires. Joe sees his business advisor twice a month to plan for his expansion and growth.
When he’s at the office, everyone needs a piece of Joe and his time. To focus on the basics, Joe’s business rents his house for $ 795 per month, and Joe’s business deducts that $ 795.
Joe’s business advisor doesn’t charge him too much that amount, so Joe basically ends up setting up his business for free.
Like any tax strategy, the use of the rental property must be documented, and the advisor provides it to the IRS.
You have flexibility, but there are restrictions. You can also rent your property for 14 consecutive days, but in any case, make sure you don’t exceed that number of days.
It is not a tax saving tool for C corporations or sole proprietorships. You need to charge your business a market rate. The house you rent cannot be your primary place of business and rental expenses are not deductible.
These are lenient restrictions for the chance to receive hundreds of thousands of dollars in tax-free income.