Hiring Your Kids: Tax Savings Without Breaking Labor Laws
What you’ll get in this quick read: How employing your children can save you money on taxes Why most people get this wrong Resources for...
6 min read
The Augusta Rule: Separating Fact from Fiction
Chris Middleton : Apr 24, 2024 12:26:08 PM
The Augusta Rule: Separating Fact from Fiction
11:03
What you’ll get in this quick read:
- What is the Augusta Rule
- Why most people miss thousands of dollars of deductions every year by not using this strategy
- A couple of examples of how the Augusta Rule works
I recently saw a social media video produced by a CPA stating that the Augusta Rule was a waste as it would only save someone $500-800 a year on taxes.
So, I did some math… and wow was he totally off base and completely wrong!
But I’ll come back to that. Why do I hate “Tik Tok Tax Advice”?
Because you absolutely CANNOT dissect 75,000+ pages of tax law and rules in 60 seconds.
But what the short form format of social media is great for is this… raising your awareness of what is possible.
The goal of this short blog post is to introduce you to a concept and how you can leverage that concept.
But even this short guide is not enough detail to FULLY optimize this strategy.
That is why we have a full resource for education and IMPLEMENTATION for you in the form of a step by step playbook that you can snag!
But back to that savvy fellow who claimed the Augusta Rule would only save us $500-800 a year on taxes.
I could not disagree more with him… and here’s why…
First of all, if you’re not familiar with the Augusta Rule this is what that is:
The Internal Revenue Code found in IRC Section 280A(g) allows you to rent your home for up to 14 days a year (but no more than 14 days!) and any rent that you collect will be considered TAX FREE to you…
Read that again… TAX FREE income that you are collecting!
Just to be clear, this is NOT the same thing as having a home office. Chris Middleton
Theoretically, I could rent my home out on AirBNB or some platform like that, and again, as long as I do not exceed 14 days, I don’t have to claim that as taxable income.
But is the “juice worth the squeeze?” That really doesn’t seem like it’s worth the hassle factor right? Let’s say you can get $150 a night for the home.
14 nights at $150 a night = $2,100 in revenue.
There may be some cleaning fees that can be charged but let’s say those get wiped out by AirBNB fees and costs (or whatever platform you choose).
To me, that ain’t worth it.
But THIS right here is worth it. The opportunity for tax savings for your business is this:
You can rent your home to your business for an event utilizing this same 14 day loophole.
There are some criteria (we’ll cover those in a minute) but basically, you can rent your home to your business and NOT have to deal with all the hassles of renting to complete strangers.
The criteria for you to rent your home to your business include:
- You must have a Corporation or an LLC with multiple owners (or an LLC taxes as an S-corporation)
- You cannot use the Augusta Rule for entertainment purposes and call it business
- You must document and have an established justification for the rents you charge
If you are going to host an event at your home and rent your home to your business, what type of event are you planning to have?
Realistically, I see these types of events occur with our clients:
- Networking events
- Client appreciation events
- Employee appreciation events
- Employee training events
- Strategic planning events
- Mastermind and business building events
Let me pose a question for you if I may.
When was the last time you went to a client appreciation event or networking event at someone's home and then everyone stayed the night?
Probably never if I were a betting man. And no, the middle school sleepovers that you had don’t count (that is entertainment).
So, when getting quotes for a “venue” we’re not getting quotes for overnight stay accommodations.
We’re looking for venue quotes that match the type of the event that we are hosting.
In other words, an event that is a daytime or evening event NOT an overnight.
When you shift your perspective and realize that you’re not looking for a hotel accommodation quote of what it would cost to spend the night then we can shift into defining the event and connecting with venues that are offering spaces similar to what we both have and need for a reasonable and comparable price.
Let’s illustrate this with some examples:
Example #1
A client of mine learned our methodology for the Augusta Rule and realized that she was significantly undervalued on the amount she was claiming for the Augusta Rule.
As part of her annual marketing plan she hosts 2-3 very large client appreciation events to both give thanks to her past clients and maintain a connection for potential referrals and new business.
She was hosting her annual Easter Egg hunt at her home and had invited over 500 families. That’s 500 families!!! That’s a lot of people.
Because she had a larger property (10 acres of which about 1.5 acres was being used for the Easter Egg festivities) we were able to reach out to venues such as a local winery, a local golf course, and a local event center with a large park area.
The quotes that she got back from each of these venues were $9,000, $11,500, and $3,200 respectively.
The average of those three quotes was $7,900 and that is the amount that she charged her S-Corporation as rent for this event.
Breaking this case down we see several things:
The venues matched the property of the business owner in both size and type
The business owner got multiple quotes to establish a range
The business owner took the average of the 3 quotes as to take a “reasonable” amount for rent under the Augusta Rule
She had already been hosting these large events along with several smaller business related events at her home and had been missing the write off of the VALUE OF THE VENUE. This translated for her to a nearly $60,000 write off that had simply been missed.
Assuming that she was in the 22% tax bracket (she was in a much higher bracket than that) that translates to $60,000 x 22% = $13,200 in taxes saved!
Just on the Federal taxes and not factoring any state income tax savings.
That’s a far cry from the $500-800 claim by our TikTok tax advice friend!
Example #2
Another client hosts a quarterly networking event that is a “mastermind” style workshop with 12 other business owners.
He hosts it in his home and they have a full day spent on business development, referral relationship development.
Breaking down the event that he hosts he then reached out and obtained quotes for a meeting space that would be comparable to his home.
The quote for the space included:
A large table where everyone could sit around for face to face conversations
A large audio/visual display for projecting presentations
A large whiteboard for brainstorming
The quotes that he obtained were $1895, $2150, and $1900 respectively for an average of $1,981.
He decided that the average was a good number and he actually increased the number of meetings with this group from a quarterly mastermind to a monthly meeting.
This resulted in a tax write off of $1,981 x 12 = $23,772.
He lived in an income tax free state but was in the 24% tax bracket so that $23,772 write off for his monthly networking/business mastermind meeting generated $5,705 in real tax savings.
Almost 10 times the $500 per year claim of our TikTok tax advice friend.
And, in addition, because this gentleman was doing this as a monthly meeting for 12 events he still had 2 remaining events that he could utilize before hitting the 14 day limit of the Augusta Rule.
But more importantly, beyond the tax savings generated by this found deduction for his business, he saw an increase in business being generated by his networking group. Meeting more often, discussing business challenges, and deepening the relationships created more referral business for his business and helped him be a stronger referral partner for his fellow business owners.
Good tax strategy, when implemented correctly, will not only keep your tax dollars out of the government's hands but should also strengthen your business and make you stronger.
These are a couple of real life examples of how the Augusta Rule can be optimized and how at first glance the “TikTok tax advice” can really leave you lacking!
So, if you’re still with me reading this, I am both grateful and excited.
Grateful because if you’re reading this, you’ve hopefully found it valuable enough to keep reading.
And excited because this brief introduction to this powerful tax saving strategy is exactly that: an introduction.
And while knowledge is fantastic I firmly believe that knowledge is worthless without ACTION!
In that vein, we’ve put together a little resource where you can view a video overview of the Augusta Rule and snag a PLAYBOOK that will help you implement this strategy.
You see, at www.MakeTaxesFair.com we are on a mission to serve business owners.
And we really dislike the term “small” business. There is absolutely nothing small about being in business and you’re not to “small” for the government to take your profits from.
So, to our self employed friends we sincerely say “Friend’s Don’t Let Friends Overpay The Government!”
We salute you and challenge you to do two things:
- Snag the training and playbook for this tax strategy, and
- If you found this valuable, please share this with a friend… after all, “Friend’s Don’t Let Friends Overpay The Government!”
Thank you for your time and consideration in reading this.
P.S.- On one final note, this is only one of dozens of incredibly powerful tax strategies.
If you are lacking this strategy one must wonder what other strategies you are currently NOT taking advantage of.
We can serve you and would love to connect with you to create your very own CUSTOM tax savings roadmap!
Book a time and let’s get your tax savings rolling to keep your hard earned profits where they belong… in your bank account, your home, and your community.
Tax Deductions Every Real Estate Professional Should Know About in 2024
Chris Middleton : Feb 21, 2024 1:45:52 PM
Real Estate Professionals are among the busiest professionals out there and it can be hard to find the time and energy to get all your expenses for...
Navigating the Tax Maze: Understanding Federal, State, and Local Taxes
Chris Middleton : Aug 7, 2024 3:39:48 PM
Those who know me know that I'm a big fan of memes. If you don’t know what a meme is, that's ok. A meme is an image of some sort with words imposed...