To the small business owner, every opportunity to maximize deductions and minimize liabilities is precious. One such opportunity is the Augusta rule, a tax-saving strategy that allows a business owner to rent their home as a meeting space for up to 14 days per year. By renting their home to their business, the business owner can deduct rental payments on the business tax return while avoiding taxation on their personal return. Navigating the compliance requirements of the Augusta rule, however, can be a complex endeavor, as highlighted by a recent court case.
“Over the years, financial professionals have been asking the question: ‘Can individuals rent their homes to their S-corporations?'” explained John Vance, President and Visionary of Vance Wealth. “In a recent case, the court came back and said: ‘Yes, this is allowed.’ They did not say this is a prohibited transaction. That is a big win.”
In Sinopoli v. Commissioner, the taxpayers used the Augusta rule to claim over $290,000 in rental expenses over a three-year period. While the tax code was upheld by the court – and precedent was set for the Augusta rule to be used in this manner – the taxpayers were not in compliance in their application of the code. Therefore, the court ruled that the taxpayers were not able to claim the full amount of the deduction. Here’s where the taxpayers in Sinopoli v. Commissioner went wrong.
Lack of Documentation
One of the key issues in Sinopoli v. Commissioner was the lack of sufficient documentation. The taxpayers did not provide full and complete meeting agenda, minutes or calendar items to provide evidence that these meetings actually occurred and were used appropriately.
As part of Simplify 365™, our business and tax planning program, our advisors provide all of the necessary documentation to prove that our business owners are legally and ethically implementing the Augusta rule. We help our business owners create meeting agendas, minutes and calendar items, so their recordkeeping is pristine.
No Clear Business Purpose
The Augusta rule intends for business owners to use their homes to conduct actual business. In Sinopoli v. Commissioner, the taxpayers could not reliably prove that every meeting was used for business-related purposes, which meant they could not claim the rental expense for that day.
With the support of Simplify 365™, our business owners have a clear agenda for each meeting, which includes specific business planning tasks and goals. In fact, a main goal of Simplify 365™ is to create a dedicated time and place for business owners to finally accomplish some of the high-level planning tasks they don’t have time for when they’re in the office. By outlining the specific business tasks that need to be completed, Simplify 365™ ensures that each meeting has a clear and well-documented business purpose that is more easily accomplished at home than in an easily distractible office setting.
With inadequate documentation and no clear business purpose, the home meetings reported in Sinopoli v. Commissioner were not entirely verifiable. In addition, the taxpayers in this case reported three meetings per month, which didn’t appear to be a reasonable number of meetings for the total deduction claimed – especially without proper evidence to support the fact that they actually occurred.
With Simplify 365™, we set the cadence of these meetings, so our business owners avoid reporting an unreasonable number of meetings to conduct their regular business planning. This helps business owners avoid any red flags when it comes time to file.
Unreasonable Rent Expenses
A key factor in correctly implementing the Augusta rule is the value of each rent payment. It’s crucial that the business owner accurately researches fair market value for the rental of their home, or that rental payment could be disrupted in the event of an audit, as was the case in Sinopoli v. Commissioner. The court ruled that $500 per day was sufficient for the rental of the taxpayers’ homes, while the taxpayers claimed $3,000 per day – leaving the taxpayers to pay back the difference.
As part of Simplify 365™, our advisors conduct extensive and well-informed research to determine the fair market value of the rentable common spaces in your home. This is not left up to the business owner, who may not have the necessary expertise to determine fair market value. In fact, we consult with experts in our local area to ensure that our suggested rental rates are reasonable and documented by local real estate professionals.
Unable to Meet “Ordinary and Necessary” Criteria
For any deduction to be valid, the taxpayer must demonstrate that the expense is “ordinary and necessary.” An expense is “ordinary” if it is a customary expense within the taxpayer’s industry. An expense is “necessary” if it is needed to carry out business. Additionally, this “ordinary and necessary” expense must also be considered “reasonable in amount.” In Sinopoli v. Commissioner, the court ruled that the total $290,000 claimed wasn’t “reasonable” for all the reasons listed above. The taxpayers could not reliably prove that their meetings were actually held or used for business purposes, and the rental payments they received did not reflect fair market value. Therefore, the total was deemed “unreasonable” by the court.
From start to finish, the Simplify 365™ program is designed to help business owners carve out a dedicated time and space for crucial, regular business planning tasks; at the same time, it utilizes the Augusta rule to provide a legal and ethical tax deduction in the process. Most importantly, each step helps protect business owners from incorrectly implementing this piece of tax code and, instead, aims to meet each requirement to clearly remain in compliance.
The Bottom Line
Remarkably, even though the defendants didn’t handle things properly and lacked necessary documentation, they still benefited from the Augusta rule. They successfully claimed deductions, despite significant shortcomings.
This serves as a testament to the potential of the Augusta rule when executed correctly, especially with Simplify 365™’s guidance. In fact, this case serves as a compelling example of why Simplify 365™ is the ideal partner for business owners looking to harness the potential of the Augusta rule, while staying firmly within the bounds of tax compliance.
We simplify your business and tax planning process, so you can make the most of each deduction while never losing sleep over the efficacy and legitimacy of your strategy.
For a deeper dive into Sinopoli v. Commissioner, please read the full details provided in the court documents. You can access the complete court case document by following this link: Court Case – Tax Notes. Additionally, for a comprehensive analysis of the court’s decision and its implications, you can refer to Current Federal Tax Developments. This source offers an in-depth breakdown of the court case and its impact on rent deductions for S-corporations.
If you’re a business owner looking to explore the impact of business and tax planning strategies on your bottom line, please don’t hesitate to reach out to our Simplify 365™ advisors. We’re here to assist you every step of the way, turning tax complexities into opportunities for financial growth and security. Contact us today to schedule your complimentary discovery session.
The information provided is for educational and informational purposes only and does not constitute advice. Vance Wealth does not provide tax or legal advice. You should contact your tax advisor and/or attorney before making any decisions with tax or legal implications.