Tulsans hit a slam dunk this year with the PGA 2022 and IRONMAN 2022 returning to Tulsa. Many Tulsa homeowners are taking advantage of these high traffic events and renting out their homes in part or in whole. Depending on the home and location, rental prices during these events are three to four times what they’d normal be, many Tulsans are getting rental rates of several thousand dollars a night for their homes.
Do I have to pay taxes on the rent income?
For many, the answer may be no. Years ago, Atlantean’s lobbied Congress to put an exception into the IRS Code to allow them to rent their homes for the annual Master’s golf tournament held in Atlanta, Georgia and not have to pay income tax on the rental income they received. Lucky for us, they were successful, and we now have what is known as the Augusta Rule or Section 208A(g) of the Internal Revenue Code
What is the Augusta Rule?
The Augusta Rule allows homeowners to rent their home for up to 14 days a year and exclude all income received from their personal tax return. The rental days is cumulative for the year and do not necessarily need to be consecutive. However, if you rent your home for 15 days or more in a year then you must claim ALL the rental income.
Does the Augusta Rule apply to Small Business Owners?
Yes! The Augusta Rule applies to everyone as long as you are not a sole proprietor or Schedule C filer and is a tax strategy every business owner should discuss with their tax preparer.
Details:
- Rent your home to your business
- Rent your home for 14 days a year or less
- Must be your personal residence
- Business must be a separate legal entity – the business files its own tax return
How do I Implement the 14-day Home Rental Strategy aka The Augusta Rule:
- Document the details to support your income exclusion
- Have a legitimate reason for the rental (company meetings, retreats, employee events, client events or meetings, etc)
- Determine the fair market rental rate and document sources (pro tip: carefully select days to rent your home when fair market prices in your area are at a premium for that day)
- Have your business issue you a 1099 if the total rent is more than $600 (the IRS can fine your business for failure to issue a 1099 or disallow the rent expense as a business deduction for failing to issue the 1099).
- Report the income listed on the 1099 on Schedule E and then zero it out. (Failure to report the income on Schedule E may trigger an automatic flag for review or audit since the IRS’ system will be expecting to see the income listed in your personal return.
Does the Augusta Rule Impact the Home Office Deduction?
If you are an employee/owner of an S Corp or C Corp receiving home office rent payments the Augusta Rule would not apply since you’d have more than 14 days of rent. But there is a better solution! Setting up and using an Accountable Plan to have the business reimburse you for your home office expenses. The accountable plan allows the business to take a business deduction while making the income tax-free to you as the employee. Stay tuned for our next blog on the specifics of how to set up and implement an Accountable Plan.