Maximizing Tax Deductions as a Business Owner
Listen in as John Vance, President of Vance Wealth discusses the Augusta Rule, Potential Tax Savings for Business Owners, How the Augusta Rule Works, How to Implement this Tax Deduction as well as the many benefits of scheduling a recurring Simplify Planning Day.
What Is The Augusta Rule?
IRC Section 280A(g) (also known as the "Augusta Rule"), allows homeowners to legally rent out their home to their business for up to 14 days per year resulting in a sizable tax deduction. Documentation for the deduction is vital and that's where we help.
Example of the Augusta Rule Potential Tax Savings.
If you rent your home for 14 days at a rate of $3,000 per day, $42,000 would be deducted from your corporate tax return, lowering your net business income by $42,000. If in a combined 40% tax bracket, the tax savings would be approximately $16,800 annually. Your business can deduct these rental payments on your business return, and the owner does not have to pay personal income tax as long as it qualifies under this code. This is essentially a tax-free distribution out of the company. How Does the Augusta Rule Work This sounds great, but is it too good to be true? Let's review the mechanics of how the Augusta Rule works and how Simplify365 can help you take full advantage of it.
But first, do you qualify for the Augusta Rule?
There are a couple of steps to identify if you are a candidate for this tax deduction.
1. Are you a homeowner?
If yes, you can move on to the next question.
2. Is your home your primary place of work?
You must work outside of the home in a separate office. You can move on to the third qualification if you have a separate office location.
3. Your entity type, how do you file?
You can qualify if you are a corporation (S Corp or C Corp). It gets a bit trickier if you are a Sole Proprietor, Independent Contractor, or LLC. While these entity types do not qualify, it might make sense to work with your tax professional to determine if you should establish an S Corp or an LLC filing as an S Corp.
Here is how we implement this effectively for your business.1. You must have a business purpose to rent your personal residence to your business.
2. You must have documentation to support the business purpose.
3. You must determine fair market value for a daily rental.
These are three things that we assist business owners with through Simplify365.
We recommend taking a Simplify Planning Day
Something we embrace as a firm are consistent planning, goal setting, and having a regular schedule to check in and measure progress. We recommend business owners take a monthly Simplify Planning Day!
What is a Simplify Planning Day?
It is a monthly planning day that business owners take away from normal daily activities.
To get away from the office for a Simplify Planning Day, you could utilize a hotel to do this deep thinking, or you can use your personal residence and utilize the Augusta Rule.
However, it must start with business owners embracing a monthly dedicated day to work on the important aspects of their business. This is where we most help business owners, and it is a critical part of Augusta Rule implementation.
A Simplify Planning Day is meant to help business owners work through critical issues, such as personal and family goals, and business goals. We suggest identifying three key areas you want to work on for the day. These are things you may not typically have time for at the office, because you are so busy with your day-to-day activities.
Documentation is key to taking advantage of the tax deduction. It’s important you maintain the proper paperwork to prove the rent was reasonable and the necessary meeting requirements were fulfilled. Let us help you implement our 7-step process. If you are interested in having us evaluate whether you qualify, or if you need further guidance on how we can help you implement this, we are happy to do a complimentary consultation.
Vance Wealth, Inc is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure. The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Figures produced using our internal calculator vary based on the following assumptions. The business owner has a separate business entity, the business owner owns a house, the business owner does not use their primary residence as their primary place of business, the business owner is filing as married filing jointly or single, the business owner’s savings may vary based on their taxable income, tax bracket, rental price and days home rented to the business. The figures used are generalized and not indicative of actual results, which may differ substantially. This does not reflect the impact that material economic and market factors may have had on decision making. The results shown were achieved by means of a mathematical formula. If you qualify for a QBI deduction your net benefit may be reduced.